Smiths Group Plc Ordinary 37 1/2p (SMIN)

Company overview

The Group's core activity is the manufacturing of both engineering and technological products for a wide range of customers. The business is divided into five key divisions: 1) Detection - builds security equipment, often used in airports and ferry terminals 2) John Crane – provides a series of engineering products to the petrochemical and oil and gas industries 3) Interconnect – the business manufacturers such products as power surge protection equipment and microwave sub systems for the US military 4) FlexTex – the division manufacturers so called heat solution products, including components for tumble dryers and ducting for the construction industry 5) Medical – manufacturers medical devices and critical care equipment.

HL Update (24 September 2008)

The group’s recent full year results (24Sept08) saw the relatively new chief executive (Philip Bowman) implementing significant change at the group. Three divisions are to become five, with the group’s Specialty Engineering business being split into three divisions: 1) John Crane – this business provides engineering products to the petrochemical and oil and gas industries. Both sales (+18pc) and profits had continued to make impressive progress 2) Interconnect – the business manufacturers such products as power surge protection equipment and microwave sub systems for the US military. The business continued to see good underlying progress 3) FlexTex – the business manufacturers so called heat solution products, such as components for tumble dryers and ducting for the construction industry. Sales were under pressure, given its exposure to both consumers and the construction industry.

Elsewhere, with global geopolitical tensions remaining high, the group’s Detection business continued to make solid progress (sales +16pc), although early changes to the medical division may not yet have filtered through, with sales and profits remaining relatively flat. Overall, Smiths enjoyed a 10pc rise in underlying full-year profit to £381m, at the top end of analysts’ forecasts, whilst management announced three year sales growth and profit margin targets for its now five divisions. On the downside for investors, no formal guidance was given on current trading. Furthermore, many analysts still consider the valuation to be somewhat rich, given the challenging backdrop. On the positive, management did highlight the benefits in having a diverse group of businesses in the current economic climate, whilst elements of the group’s product sales can be seen as relatively defensive. On balance, current market consensus opinion is currently negative in tone.

HL Comment (12 February 2008)

The group traces its roots back to 1851 when it was founded by Samuel Smith, then a clock and watch making business. While it might be unfair to call today’s Smith Group a conglomerate, the business is formed via three major divisions. A former fourth division, Aerospace, has only recently been sold to General Electric of the USA. Specialty Engineering now generates the lion’s share of group profits, with the medical division coming in next and the Detection division accounting for the balance.

The group’s recent trading update (11Feb08) saw management noting its expectation for full profits to materialise in line with current analysts’ forecasts. However, whilst the speciality engineering division continued to make progress in both sales and profits, trading in the medical division remains more challenging. Supply and logistical issues are currently causing challenges and management is working hard to rectify the problems. As for the detection business, new contracts have been won and longer term progress is expected, but short term implementation costs are likely to hit profits near term.

Acting for negative investor concerns, currency movements remain a concern – given significant sales in US dollars - and progress at the medical division is still yet to convince. On the positive front, the positioning of Phillip Bowman as the new Chief Executive has raised speculation that the company could eventually be broken up/sold –given Mr Bowman’s previous record at both Allied Domecq and Scottish Power – and broad sales progress continues to be made. On balance, market consensus opinion is broadly neutral in tone.

All yield figures are variable and not guaranteed.

Fundamental Data

* Prior to 31st July 2005, figures were stated under UK Generally Accepted Accounting Principles (GAAP). Recent figures stated under International Financial Reporting Standards (IFRS).