ii view: engineer Smiths Group rockets to record high

Strategy update

Chief executive Roland Carter said:

"We are pleased with the financial and operating performance of the Group over recent years, including the recent upgrade to earnings. Against this strong backdrop and since my appointment, the Board has spent considerable time evaluating the options to maximise shareholder value and address the persistent discount to the significant value embedded within the Group.

"We start from a position of strength and as we execute this strategy, we will become a more focused business with significant potential for future growth and value creation.”

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ii round-up:

Diversified engineer Smiths Group (LSE:SMIN) today underlined an increased emphasis on shareholder value as it detailed plans to reduce its business interests and return cash to shareholders.

Smiths Group businesses generating sales of close to two-fifths of its total will now be sold or demerged, with a large portion of disposal proceeds being returned to shareholders.   

Shares in the FTSE 100 company soared 11% in UK trading having come into this latest news down 3% in 2024. That’s in contrast to a near 6% gain for the FTSE 100 index itself over last year. 

Smiths will now look to focus on its John Crane division, making items such as mechanical seals for oil & gas companies, as well as Flex-Tek, its business making parts to heat and move liquids for industries such as aerospace.

The group’s Interconnect division, making connectivity items for industries including defence and semiconductor testing, is to be sold, with sale completion targeted before the end of 2025.

After that, Smiths plans to either sell or demerge its Detection business, making items such as luggage scanning equipment at airports. 

The group’s share buyback programme will now be increased to £500 million, with £350 million added to an existing £150 million programme. This comes in addition to returns of future business disposal proceeds.

A new board committee is being formed to oversee the planned strategic moves.

ii view:

Tracing its history back to 1851, Smiths today employs around 15,000 people across more than 50 countries. Shared characteristics for the current four divisions include being well-positioned in growing markets, technology-led, and with a high proportion of aftermarket revenues.

For investors, the downside of separating the existing four divisions is reduced business diversify. Many customers for what will be its remaining John Crane and Flex-Tek divisions are from cyclical industries such as energy, mining, construction and aerospace. Costs for businesses generally remain elevated, while currency headwinds can have an impact, with less than 5% of group sales made in the UK.

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On the upside, a separation of existing businesses should help provide a more focused valuation. Disposal proceeds are largely being returned to shareholders, avoiding the potential for management to reinvest badly. The remaining John Crane, Flex-Tek business could be more vulnerable to takeovers, while a forecast dividend yield of around 2.5% is not to be ignored.

In all, moves by the relatively new chief executive to enhance shareholder value are to be applauded. That said, a share price now broadly matching the consensus analyst estimate of fair value at £20.50 suggests the share price may now be up with events.  

Positives: 

• A diversity of business type, underlying customer, and geographical location
• High proportion of aftermarket revenue

Negatives:

• Exposure to volatile industries                       
• Uncertain economic outlook

The average rating of stock market analysts:

Buy