Smiths Group PLC

Smiths Group PLC (LON: SMIN) is a FTSE 100 listed entity that develops, manufactures, and sells control systems and instrumentation for industrial applications.

SMIN’s ex-dividend date for the final dividend is 21 October 2021, while the dividend payment date is 19 November 2021.

Rationale for Valuation – HOLD at GBX 1,404.00

• Profitability: In FY21, SMIN demonstrated strong profit conversions and earnings growth.
• Cash Generation: FY21 was another year of excellent cash generation as operating cash conversion stood at 125%. It is well-positioned for accelerated growth in core industrial technology business.
• Stronger Margins: Smiths Group has maintained higher EBITDA margin than the industry median of 14.7% between H1 FY19 to H1 FY21. Similarly, the quick ratio and current ratios have remained above the industry median since H1 FY19.
• Technical: From a technical standpoint, the momentum oscillator 14-day RSI (~44.45) confirms the oversold position, while the price is hovering close to the lower Bollinger Band.

Key Risks

• The constant surge in Consumers’ Price Index and Producer’s Price Index globally amid supply chain disruption, and inflationary concerns can dampen the investors’ sentiment and business prospects.
• Due to the resurgence of the pandemic, travel restrictions can have an impact on new business and pipeline opportunities. Similarly, lengthening of the sales cycle could have an impact on cash flows.
  

Recent News 

Disposal: On 8 September 2021, Smiths Group agreed the disposal of ICU Medical Inc at an enterprise value of US$2.7 billion. 

Financial Highlights (for the year ended 31 July 2021, as on 28 September 2021)

 (Source: Company Website)

• During FY21, SMIN recorded good order book momentum, and 7% year-on-year growth in operating profit.
• There was a margin improvement across all divisions, while restructuring programme was also completed.
• The Group has also strengthened the business by acquiring Royal Metal and focusing on organic growth.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion 

Smiths Group recommended an 8% increase in final dividend, reflecting confidence in the outlook. It has a strong order book momentum to capitalise on market opportunities once the market recovers. It showed business resilience in FY21 and sustained robust performance despite market disruption. Moreover, the disposal of Smith Medical shall simply the business to focus resources on its core industrial technology business. The stock made a 52-week High and Low of GBX 1,669.50 and GBX 1,309.50, respectively. 

Based on the restructuring benefits, improved market trends, robust cash generation, dividend increase, continued market recovery, and favourable valuation conducted above, we have given a “HOLD” stance on Smiths Group PLC at the current price of GBX 1,404.00 (as on 18 October 2021, 8:35 AM GMT+1).

Pearson PLC

Pearson PLC (LON: PSON) is a FTSE 100 index listed Company that provides learning services by providing assessment, content, and digital solutions to universities, colleges, and schools.

Investment Rationale – BUY at GBX 600.80

• Strong Fundamentals: Pearson delivered strategic, operational, and financial progress in 9M FY21, and showed a solid rebound with encouraging momentum in the underlying business.
• Outlook: It reaffirmed that FY21’s adjusted operating profit shall remain in line with the market expectations.
• Robust performance in Assessment & Qualifications shall offset declining enrolments in Higher Education.
• Technical Indicator: From a technical standpoint, the momentum oscillator RSI (~18.19) confirms the oversold position, while the stock is hovering below the lower standard deviation of the Bollinger Bands.
• Valuation Multiples: In terms of forward 12-month – Price/Earnings, Price/Cash Flow and Price/Book valuation multiples are undervalued against the industry median of the Media & Publishing industry. Moreover, its dividend yield is higher than the industry median.

Key Risks

• Pearson’s net debt increased to £646 million at the end of June 2021 from £463 million at the end of FY20, which can impact its finance costs and liquidity.
• The international markets are opening slower than anticipated due to resurgence in Covid-19 cases.
• The prolonged closure of schools and test centres can cause liquidity risk and procrastinate its growth plans.

Recent News

Filed Copyright Infringement: On 15 September 2021, Pearson filed a suit against its former partner, Chegg for copyright infringement. Pearson claimed that Chegg has leveraged Pearson’s material fort answer sets.

Trading Update (for the nine months ending 30 September 2021, as on 15 October 2021)

• Pearson reported a 10% year-on-year growth in Group underlying revenue, driven by 14% and 15% revenue growth in Virtual Learning and English Language Learning division, respectively.
• The new organisation structure is now operational, while the new US learning app, Pearson+ progressed well.
• The disposal of Brazilian K12 Sistemas business also supported the operational progress.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Pearson demonstrated disciplined capital allocation approach and maintained a robust balance sheet. Moreover, the Company showed strategic progress with implementing a new organizational structure, strategic review of international courseware, and launched a new college learning application for US students.

Although, there are Covid-19 challenges in some of its major markets, Pearson is moving in the right direction to meet its current market expectations. The stock made a 52-week High and Low of GBX 909.00 and GBX 484.40, respectively.

Based on the growth in underlying revenue, strategic progress, confidence in the outlook, reduced net debt, with support from the valuation conducted above, we have given a “BUY” recommendation on Pearson PLC at the current market price of GBX 600.80 (as on 18 October 2021, 8:45 AM GMT+1), with lower double-digit upside potential based on 21.67x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*All forecasted figures and Peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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