Smiths Group PLC

Smiths Group PLC (SMIN) is a London, United Kingdom-headquartered technology company which engages in inventing, designing and delivering solutions with operations in more than 50 countries. The group enables industry, improves healthcare, enhances security, advances connectivity and supports new homes by developing, manufacturing and selling control systems and instrumentation for industrial applications to customers based in over 200 countries and territories around the world. The operations of the group are differentiated in four operating segments, namely Northern Europe, Southern Europe, East Europe and North America.

Financial Highlights (FY 2019, in £m)
 
(Source: Company Filings)

The underlying growth in revenue was 3%, which was in line with expectations, while revenue from continuing operations grew by 7% over the year from £2,328 million in the prior year to £2,498 million in the current period.On a statutory basis, after taking into account all items excluded from the headline performance, operating profit of £326 million was £16 million lower than the last year (FY 2018: £342 million), while reported headline operating profit rose to £427 million (FY 2018: £388 million), up by 10% or £39 million, helped by favourable foreign exchange translation (£11 million) and net impact of acquisitions and disposals (£13 million).Statutory profit before taxation from continuous operations rose by 6% to £304 million, while headline profit before taxation from continuous operations rose by 13% on a reported basis to £376 million from £333 million in the prior year. Statutory profit after taxation from continuous operations rose by 19% to £142 million and headline profit after taxation from continuous operations rose by 11% to £273 million. Total headline profit after tax rose by 7% from £361 million reported in the prior year to £385 million and total statutory profit after tax decreased by 19% to £227 million (FY 2018: £279 million). Headline basic EPS rose by 7% to 96.8p while statutory basic EPS was down by 19% to 56.8p (FY 2018: 70.0p).

Share Price Commentary

Daily Chart as at 31-October-19, before the market closed (Source: Thomson Reuters)

On 31 October 2019, at the time of writing (at 9:43 am GMT, before the market closed), SMIN shares were trading at GBX 1,620, down by 0.18 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,701.00/GBX 1,307.50. The company's stock beta was 0.70,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £6.43 billion, with a dividend yield of 2.83 per cent.

Conclusion
The demand for products offered by Smiths Medical has got a boost from increasing healthcare spending in developing markets and ageing populations with increasing personalised healthcare and patient expectation/quality of life. Strong demand from the medical industry and growth market coupled with high return segments like Smiths Medical and John Crane,and steady growth of the US housing construction market supported by expanding the international market for corrugated stainless-steel tubing for residential housing augurs well for the group.Regulatory changes and the imposition of tariffs on trade between the UK and the European Union poses a severe threat to the company as well, as ongoing macro-economic uncertainty would impact volumes in some markets mainly for those economies with significant export-led market exposure.

Based on the above rationale we have given a "HOLD" recommendation at the current price of GBX 1,620 (as on 31-October 2019, before the market closed).
 

Volution Group PLC

Volution Group PLC (FAN) is a Crawley, United Kingdom-headquartered leading supplier of ventilation products, which consists of 15 key brands and operates across two business segments, namely Ventilation Group and OEM (Torin-Sifan). The company seeks to improve indoor air quality and reduce energy consumption, with primary markets of the group being the UK, the Nordics, Central Europe and Australasia, and it caters to the residential and commercial construction markets. The OEM (Torin-Sifan) segment manufactures and supplies motors, motorised impellers, fans and blowers, while Ventilation Group primarily supplies ventilation products for both public and private new build and refurbishment applications.

Financial Highlights (FY 2019, in £m)
 
(Source: Company Filings)

With organic growth across all market sectors except for UK Export and the Nordics, organic growth in revenue was 2.6% (3.5% at constant currency), while group revenue for the year ended 31 July 2019 was recorded at £235.7 million (2018: £205.7 million), an increase of 14.6% (15.7% at constant currency). Gross profit for the year rose to £111.07 million from £96.63 million in the prior year. Reported operating profit increased to £24.7 million (2018: £17.5 million), which reflected adjustments of £17.39 million, and adjusted operating profit, assisted by acquisitions, increased by 13.3% to £42.1 million (2018: £37.1 million). Increased sourcing costs in the OEM (Torin-Sifan) segment and some operational inefficiencies at the new Reading facility adversely impacted the adjusted operating margin, which declined to 17.8% (2018: 18.0%). Adjusted profit before tax stood at £39.9 million and reported profit before tax increased by £6.4 million to £23.1 million (2018: £16.7 million). Adjusted basic earnings per share grew by 10.3% to 16.0 pence (2018: 14.5 pence) and reported basic earnings per share rose by 37.3% to 9.2 pence (2018: 6.7 pence). Adjusted operating cash inflow was £36.9 million (2018: £34.4 million) and cash conversion remained strong at 85% (2018: 90%), while year-end net debt was £74.6 million (2018: £77.2 million), which represented leverage of 1.6x adjusted EBITDA. As the group has proposed a final dividend of 3.30 pence per share, full year dividend was up by 10.4% to 4.90 pence per share (2018: 4.44 pence).

Valuation Methodology
Method:  Price/Earnings Approach (NTM)


Share Price Commentary

Daily Chart as at 31-October-19, before the market closed (Source: Thomson Reuters)

On 31 October 2019, at the time of writing (at 9:38 am GMT, before the market closed), FAN shares were trading at GBX 199, up by 1.01 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 210.00/GBX 140.00. The company's stock beta was 0.61,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £390.53 million, with a dividend yield of 2.49 per cent.

Conclusion
While the company reported decent growth in financials, several risks to operation can stymie further improvement. Moreover, the group is trading near 52-week high, suggesting that the market has priced in the improvement in the latest financials. The group faces regulatory risks relating to potential changes to the UK and EU-based law and increases in the tariffs and duty on goods and raw materials imported into the UK from the EU and exported to the EU can also lead to higher costs and delays. Raw materials or components may become difficult to source because of material scarcity or disruption of supply, and a decline in general economic activity and a specific decline in activity in the construction industry can adversely impact the group.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the current price of GBX 199.0 (as on 31 October 2019, before the market closed), while we look for any upcoming catalysts in the near term.
 
*Peers of the company are Redrow PLC, Persimmon PLC, Barratt Developments PLC, Travis Perkins PLC, Berkeley Group Holdings PLC and Ferguson PLC
*All forecasted figures and peers have been taken from Thomson Reuters.

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