- Record like-for-like revenue growth in first half
- Medium-term growth target increased
- Margins to grow in coming quarters
FTSE 100 engineering firm Smiths Group (SMIN) delivered another quarter of higher revenues and earnings and lifted its medium-term underlying sales growth target.
The shares gained 1.2% to £17.35 making Smiths the best-performing stock in the blue-chip benchmark, which found itself dragged down over 1% by another weak session for the big banks.
A WORLD-CLASS BUSINESS
The group, which operates globally in the aerospace, energy, industrial and security markets, posted 13.5% organic growth in sales to £1.5 billion in the six months to the end of January.
As a result of this record increase, the firm has raised its medium-term organic sales growth target to 8% from between 4% and 6% previously.
Growth in the first half was driven by strong sales in the energy and industrial markets in particular, with revenues up 17.1% and 15.4% respectively.
The industrial division, which makes up 42% of revenues, was helped by strong demand for John Crane products from the life science, paper and pulp and chemical processing sectors as well as for Flex-Tek’s construction products.
Operating profits increased by 27.4% on a reported basis and 12.7% on a like-for-like basis to £241 million, representing a margin of 16.1% on sales against 15.9% a year ago.
However, those figures belie the fact the firm invested heavily in inventory to support its strong order book at Smiths Detection and it saw a jump in demand for OE products which have a lower margin than after-sales products and services.
Adjusting for the mix effect alone would have seen operating margins top 17%, but the positive aspect of higher OE sales is it means higher after-sales revenues down the line once the customer has installed the kit.
A CULTURE OF SELF-IMPROVEMENT
The interim results are notable for the amount of work the firm is putting into improving not just its margins but its operational resilience through its SES programme (Smiths Excellence System) and its practice of assigning ‘black belt’ trouble-shooters to advise and rectify problem areas.
SES projects have already contributed £5 million in operating profits through the first half and are expected to generate around £12 million of benefits in the second half, equivalent to an annual run-rate of £25 million.
At the same time the firm has identified several cost-saving projects and is taking a one-off charge of between £35 million to £40 million this financial year in order to generate recurring annual savings of between £25 million and £30 million from the start of the next financial year.
