Engineering conglomerate Smiths Group (SMIN) tops the FTSE 100 loser board on Friday (21 September) after reporting full year to 31 July results that clearly show why it is keen to offload its medical business.
Shares in the company have fallen nearly 6% to £15.01, and are 16% lower since June.
While returning to underlying revenue growth (albeit up a modest 2% after stripping out currency effects), headline pre-tax profit still fell 8%.
Return on capital employed (ROCE), a key measure for many investors in establishing how hard the company is putting shareholder’s cash to work, declined 160 basis points to 14.6%.
CONCENTRATION TRANSFORMATION
The issue seems to revolve around what the group is, and what it is trying to become. Smiths remains a diverse collection of businesses providing everything from sensors for explosives to hospital equipment and oil services.
There have been frequent calls for the business to be broken up or for some assets to be sold off to allow the rump to concentrate on the best growth opportunities. Smiths resisted these demands for years but has more recently relented.
A plan to merge the medical business with US-based ICU Medical in a £7bn agreement recently collapsed, and today’s results illustrate why this has come as a big blow to investors.
Its medical division has been put through the wringer in recent months thanks to regulatory pressures and contract problems.
This unit got no respite during the latter part of last year either; reported revenues fell by 7%, while profit margins dropped from 22% to 17.6%, below expectations.
RECOVERY ELSEWHERE
It’s a shame because the rest of the business seems to be ticking along fairly nicely, largely posting decent progress on both headline and underlying metrics.
John Crane is reviving thanks to a recovery in the oil services market while there is firm demand for detection devices and security scanners from air travel and security customers.
US housing markets continue to drive heating product sales at the Flex-Tek division too.
Management remain largely upbeat on prospects and anticipates 2019 results to at least match this year’s underlying revenue growth.
They also expect the pressure on the medical division to ease and perhaps a sale can be resurrected down the line.
Analysts remain largely supportive with some even suggesting that this could be a good time to pick up a small stake in the company at a relatively discounted price.
