Smiths Group Plc – Operating with Resilient Business Model

Smiths Group Plc (LON: SMIN) is a FTSE 100 multinational technology Company. The Company provides various application, control systems, and instruments for advanced technologies.

On 24^th September 2020, the Group will announce the full-year results for FY20.

Trading Update
On 30^th June 2020, the Group provided a trading update and launched a strategic restructuring programme that will cost approximately GBP 65mn. Savings are to substantially offset the cost in the financial year 2021 and deliver an approximately GBP 70mn of full annualised benefit starting in the financial year 2022.

According to trading update, the underlying revenue from continuing operations increased by 2% in the ten months ended 31 May 2020, while year-to-date revenue surged by 6%, with an increase of 3% from the acquisition of United Flexible. For the four months of the second half ended 31 May 2020, the underlying revenue surged by 1%.

Despite the recent slowdown (driven by disruption to customer service), John Crane revenue stayed in growth on a year-to-date basis. Smiths Medical managed to sustain growth, with underlying revenue increased by 1% year-to-date.

As per the liquidity, Smiths has cash balances exceeding GBP300mn. Along with the undrawn RCF (revolving credit facility) of GBP 640mn, the Group has access to approximately GBP 950mn of surplus liquidity.

Share Price Performance

1-Year Chart as at June-30-2020, after the market close (Source: Refinitiv, Thomson Reuters)

Smiths Group Plc’s shares closed at GBX 1,412.00 on 30th June 2020, which was up by 8.78% against the last day closing price. Stock 52 week High and Low were GBX 1,778.50 and GBX 790.00, respectively.

From the technical standpoint, shares were trading well above the short-term support level of 20-day simple moving average prices, which reflects an upward trend in the stock.

Valuation Methodology


Key Risks
The threats to free trade have increased considerably in the last year and show no sign of abating. This will have an adverse impact on business performance due to the imposition of the tariffs. Moreover, the sanctions have already affected trade with Iran and Russia.

Conclusion
The Group witnessed the strong order book at the outset of the Coronavirus crisis. Currently, the Company is operating in all the 75 manufacturing plants but are not immune to higher consequential costs. Smiths Detection’s performance has been strong, with winning new original equipment programmes. Smiths Interconnect revenue suffered in H1 FY20 due to global connector market weakness, but orders and revenue have improved more recently. The Group did not provide any new financial guidance, having withdrawn 2020 guidance back in March 2020 over COVID-19 uncertainties.

The Group has a resilient business model, with strong operating cash conversion. Moreover, Smiths Group is a world-leading technology Company which has consistently outperformed the chosen markets and offers a robust financial framework.

For energy efficiency, the Group is developing several new products for greener future such as John Crane’s dry gas seals reduces methane gas emission. The demand for products offered by Smiths Medical has got a boost from increasing healthcare spending in developing markets, ageing populations with increasing personalised healthcare and patient expectation/quality of life. The Group’s demand and supply are impacted due to outbreak of Covid-19, and it has taken steps to preserve cash and reduce the cost to manage the impact on financial stability.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the closing price of GBX 1,412.00 (as on 30th June 2020) and will recommend fresh buying at the right time.

Diploma Plc - Decent Results in the Challenging Environment

Diploma Plc (LON: DPLM) is a FTSE 250 listed holding Company, which supplies specific technical services and products worldwide. The Company is organised into three different business sectors: Seals, Controls, and Life Sciences.
On 27^th August 2020, the Group will release the third quarter of 2020 results.

Recent News
On 23^rd June 2020, the Company confirmed that Barbara Gibbes had been appointed as Chief Financial Officer (CFO) by the Board at the meeting held on 22^nd June 2020.

Financial Highlights (for the six months ended 31 March 2020)

(Source: Company Website)

On 11^th May 2020, the Company provided the half-year results, with robust performance and resilient business model responding to COVID-19 challenges. Group revenues benefitted from a healthy contribution from acquisitions and on a constant currency basis surged by 10% (up 9% on a reported basis) to GBP 283.6mn (H1 FY19: GBP 260.4mn).

The Group's cash flow from operating activities augmented by GBP 12.9mn to GBP 43.0mn (H1 FY19: GBP 30.1mn), which included a credit of GBP 3.6mn on the adoption of IFRS16. On a like-for-like basis, the increase in cash flow from operations, reflecting a combination of a smaller investment in working capital of GBP 13.1mn and decent operating profit.

The Company recorded an approximately 16% drop on an actual basis (down 28% on an underlying basis) in revenue for April 2020 due to COVID-19, but it continues to generate good operating profit and cash flow. On 31^st March 2020, DPLM had GBP 29.9mn of net bank debt and GBP 66.0mn of available liquidity.

Share Price Performance

1-Year Chart as at June-30-2020, after the market close (Source: Refinitiv, Thomson Reuters)

Diploma Plc’s shares closed at GBX 1,795.00 on 30th June 2020, which was down by 2.23% against the last day closing price. Stock 52 week High and Low were GBX 2,152.00 and GBX 1,191.00, respectively.

From the technical standpoint, shares were trading well below the short-term support level of 20-day simple moving average prices, which reflects a downtrend trend in the stock.

Valuation Methodology


Key Risks
The Company’s operations are impacted by risks related to market trends, political change and change in the policies of regulatory authority.

Conclusion
The Company said it had delivered a decent first-half performance, but the outlook for the second half stays uncertain amid elevated global volatility hurting the Company’s operation in many of the major markets. The Group has a decent segmental performance from all the business units. Diploma had posted a decent underlying operating income. The Company has also shown a resilient business model and decent balance sheet and liquidity.

Further, the Group decided to suspended payment of an interim dividend given the existing uncertainty. It also has taken effective actions to mitigate the impact of COVID-19 crisis on the business, including freezing all capital expenditure and discretionary spend and decrease in basic salary/fees of 20%. Moreover, the global political and economic climate has become more uncertain, which may give an early warning of slowing demand and have a potential impact on key markets.
Based on the headwinds faced by the Group, we have given a "WATCH" recommendation at the closing market price of GBX 1,795 (as on 30^th June 2020), while we look for any upcoming catalysts in the near term.
 
*All forecasted figures and information have been taken from Thomson Reuters.

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