ii view: specialist engineer Smiths’ shares soar

First-quarter trading update to 1 November

• Adjusted or organic revenue up 13.1%
• Share buyback programme raised to £150 million from £100 million

Guidance

• Now expects full-year organic revenue growth of 5% to 7%, up from a previous 4% to 6%
• Now expects a 0.4% to 0.6% expansion in the full-year 2025 operating profit margin

Chief executive Roland Carter said: “Innovation and execution remain a major focus as we advance our new product development and commercialisation capabilities, and our productivity improvements, which contributed to the strong quarter. 

“Our strategy to deliver profitable growth from secularly attractive markets continues to drive our performance.”

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ii round-up:

Specialist engineer Smiths Group (LSE:SMIN) today summarises early financial year 2025 trading as “outstanding”, with sales growth achieved across all four divisions. 

Adjusted first-quarter sales stripping out acquisitions rose 13.1% year-over-year, up from growth of 3.5% in the first quarter of last year. As such, Smiths now expects full-year organic revenue growth of 5% to 7%, up from a previous 4% to 6%, helping to push an estimated expansion in the 2025 operating profit margin of up to 0.6%.

Shares for the FTSE 100 company soared 13% in UK trading having come into this latest news down by a similar amount year-to-date. Shares for fellow engineer Melrose Industries (LSE:MRO) are down around 10% in 2024. The FTSE 100 index itself is up 4%.   

Group strategy under relatively new CEO Roland Carter, former divisional head, has included the launch of a new efficiency enhancement plan, as well as a push to invest in proprietary technologies and differentiated products. 

Organic sales for the detection business, which makes screening equipment for locations such as airports and accounts for 28% of last year's revenues, rose by a double-digit amount. Performance was aided by the installation of next generation technology.

Sales on the same basis for Smiths’ biggest revenue generator at 36%, John Crane - which makes items including mechanical seals for industries such as oil & gas and mining - improved by a single-digit amount. Crane’s efficiency drive during the period included consolidating manufacturing operations in India and away from a Thailand facility. 

Smiths’ interconnect division, given a tough year-ago comparative, reported organic sales growth of over 30%. Performance was assisted by wins for its computer-chip test related operations. Interconnect accounted for 11% of last year’s sales. 

Heightened management confidence in the outlook supported an increase in the full-year share buyback programme to £150 million from a previous £100 million. First-half results to 31 January are scheduled for 25 March. 

ii view:

Smiths employs around 15,000 people across more than 50 countries. Shared characteristics of the four divisions include being well-positioned in growing markets and technology-led, and having a high proportion of aftermarket revenues. Flex-Tek, at 25% of last year’s sales, makes components that heat and move liquids and gases for the construction, industrial and aerospace markets.

For investors, tough comparatives for John Crane and Detection could still dent growth levels going forwards. Demand from customers such as oil companies, miners, construction and aerospace can prove volatile and sensitive to economic health. Costs for businesses generally remain elevated, while currency headwinds can impact, with less than 5% of group sales made in the UK.

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To the upside, the new chief executive, in place since March, is attempting to inject renewed vigour into group strategy. Diversity across product, geographical region and underlying customer sector exists. Exposure to areas such as renewable energy, semiconductors and outer space offer growth potential. Bolt-on acquisitions persist, while an estimated future dividend yield in the region of 3% is not to be overlooked.  

For now, and despite continued risks, a consensus analyst estimate of fair value stood at close to £20 per share is likely to mean fans of this niche engineer remain interested. 

Positives: 

• Diversity across business type, underlying customer sector, and geographical region
• High proportion of aftermarket revenue

Negatives:

• Exposure to volatile industries                       
• Uncertain economic outlook

The average rating of stock market analysts:

Buy