Morning Note: Market news and an update from engineer Smiths Group

 Market News

US equity markets closed lower last night – S&P 500 (-0.3%), Nasdaq (-0.3%) – despite some support being provided by Nvidia & Micron Tech. JPMorgan’s Marko Kolanovic says rate cuts and healthy earnings growth are needed to justify current valuations.

This morning in Asia, markets were generally firm: Nikkei 225 (flat); Hang Seng (+1.2%); Shanghai Composite (+0.2%). The offshore yuan rose after the PBOC signaled its support for the currency for a second day, shifting its fixing 0.1% higher. The FTSE 100 is currently trading 0.2% lower at 7,901, while Sterling buys $1.2650 and €1.1658.

The 10-year Treasury currently yields 4.24%. Bond giant Pimco fears an inflation hit to US Treasuries and is holding a smaller-than-usual position, preferring bonds from the UK and Canada, CIO Andrew Balls told the FT. Gold trades at $2,178 an ounce.

Brent held at $86.60 a barrel, with OPEC+ cutbacks and geopolitics in focus. Summer pump prices in the US will probably rise to $4 a gallon, highest since 2022, according to AAA.

German GfK consumer confidence remained very subdued at -27.4 in April, albeit in line with expectations (-28.0) and a slight improvement on the previous month (-28.8). Meanwhile, France’s budget deficit expanded to 5.5% of economic output in 2023, far wider than the budgeted 4.9%. 

Source: Bloomberg

Company News

Smiths Group has this morning released solid half-year results for the six months ended 31 January 2024. The company has reaffirmed its full-year guidance and initiated a new share buyback programme. In a separate release, the group has announced its CEO is to stand down. In response, the shares are little changed in early trading.

Smiths is a global engineering and technology company exposed to a broad range of industries including safety and security, general industrial, energy, and aerospace. The company supplies market-leading products and services, with a significant aftermarket activity. The business model is asset-light, with low capital expenditure as a percentage of sales. The group’s high-value business model enables price capture in excess of input cost inflation.

The group is focused on four divisions: John Crane (energy and process solutions); Smiths Interconnect (connectivity solutions); Flex-Tex (components for fluids and gases); and Smiths Detection (detection and authentication). This means the company is positioned to access several powerful megatrends including the energy transition, the insatiable demand for data, ever-rising security needs, and increased sustainability.  

The group’s medium-term financial targets are organic revenue growth of 4%-6% (with additional upside from M&A); operating margin of 18%-20% (vs. 16.3% in FY2022); EPS growth of 7%-10% (with additional upside from M&A); return on capital employed of 15%-17% (vs. 14.2% in FY2022); and operating cash conversion of 100%+.

In the period under review, reported revenue increased by 0.7% to £1,507m.  Stripping out the impact of M&A and currency movements, revenue grew by 3.9% in organic terms against record comparator versus the prior year (+13.5%). The group has now delivered 11 consecutive quarters of organic revenue growth. Order growth was 16.5%.

Organic revenue performance in the four divisions was as follows:

-          John Crane (+12.7%), driven by strong execution across a record order book.

-          Smiths Detection (+8.9%), with particular strength in computed tomography for airport checkpoints and chemical detection for defence.

-          Smiths Interconnect (-13.7%), with improved performance in the second quarter.

-          Flex-Tex (-4.1%), driven by softness in the US construction market.

Operating profit grew by 5.3% in underlying terms to £246m, with the margin up 20 basis points to 16.3%, despite increased reinvestment for growth. Underlying EPS grew by 4.5% to 48.7p and ROCE was up 50bps to 15.7%.

Cash conversion was 89% resulting from working capital improvement. R&D investment continued to drive innovation and organic growth. The next-generation threat detection technology in airports was rolled out around the world and the group won significant projects in carbon capture, blue hydrogen, and electric battery manufacturing.

Free cash-flow more than doubled to £112m. Net debt stood at £505m at the end of January 2024, with gearing of 0.9x net debt to EBITDA versus a stated leverage policy to operate under 2.0x. The group is committed to a progressive dividend policy and has declared an interim payout of 13.55p, up 5%. During the first half, the £742m share buyback programme was completed and the group has today announced a new £100m programme, with the first tranche of up to £50m to be completed by the end of September.

The group has also announced that Roland Carter (Head of Smiths Detection) has been appointed as CEO, with immediate effect, following Paul Keel’s decision to step down to take on a new role as chief executive of a US public company.

Looking forward, the group sees continued strength in end markets like aerospace, security, and energy, as well as gradually improving conditions in the industrial segments that were softer in the first half. Full-year guidance of 4%-6% organic revenue growth has been maintained, underpinned by commercial wins, with continued margin expansion.

Source: Bloomberg