Morning Note: Market news and an update from engineer Smiths Group.
Market News
US equities edged higher last night – S&P 500 (+0.3%); Nasdaq (+0.1%) – with gains in energy, utilities, and real estate, partly offset by declines in banks and biotech. Boeing rose after it offered its largest union a 30% wage hike in a bid to end a strike.
The 10-year Treasury yields 3.75%. Austan Goolsbee is forecasting “many more” interest rate reductions over the next year given that rates need to be lowered “significantly” to protect the economy. Gold remained firm at $2,626 an ounce as Middle East tensions escalate.
In Asia this morning, equities rallied – Nikkei 225 (+0.6%); Hang Seng (+4.1%); Shanghai Composite (+4.2%) – after China’s central bank announced stimulus measures in a bid to reach this year’s economic growth target and stem a sell-off in the equity market. The reserve requirement ratio, key short-term rate and outstanding mortgage rates will be lowered, while the authorities said they are studying setting up a stock stabilisation fund. Most Asian currencies strengthened against the dollar. Commodities were also firm, with Brent Crude ($74.30 a barrel) and metals trading higher.
European stocks have also opened higher, with the FTSE 100 0.4% higher at 8,291. Mining stocks are rallying on the back of the China stimulus. Sterling remained firm at $1.3334 and €1.2010.
Source: Bloomberg
Company News
Smiths Group has this morning released results for the financial year to 31 July 2024 (FY2024) which were slightly below market expectations. The new CEO has launched an Acceleration Plan to enhance profitability and productivity, and new guidance for FY2025 has been issued. In response, the shares are 6% lower 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% (16.8vs. % in FY2024); EPS growth of 7%-10% (with additional upside from M&A); return on capital employed of 15%-17% (vs. 16.4% in FY2024); and operating cash conversion of 100%+.
During the year, reported revenue increased by 3.1% to £3,132m. Stripping out the impact of M&A and currency movements, revenue grew by 5.4% in organic terms, towards the upper end of the group’s 4%-6% guidance.
Organic revenue performance in the four divisions was as follows:
- John Crane (+9.8%), driven by strong execution across a record order book, especially in energy.
- Smiths Detection (+11.1%), with strength in aviation, in particular computed tomography for airport checkpoints.
- Smiths Interconnect (-6.5%), with weakness in connectors and the semiconductor test end market.
- Flex-Tex (-0.8%), driven by softness in the US construction market which more than offset strength in aerospace.
Operating profit grew by 7.1% in underlying terms to £526m, slightly below the market forecast of £535m. The margin expanded by 34 basis points in organic terms to 16.8%, in line with the guidance for continued margin expansion. Underlying EPS grew by 8.3% to 105.5p and ROCE was up 70bps to 16.4%.
Cash conversion was 97% driven by a focus on working capital, with free cash-flow up 67% to £298m. R&D investment of £109m continued to drive innovation and organic growth. M&A supports organic growth and this morning the group has announced two strategic acquisitions for up to £110m, enhancing Flex-Tek’s HVAC and industrial heating businesses.
Net debt stood at £213m at the end of July 2024, with gearing falling from 0.7x to 0.3x 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 a full-year payout of 43.75p, up 5.2%, to yield 2.5%. The first £50m tranche of the group’s £100m share buyback programme has been completed.
Smiths also launched a group-wide Acceleration Plan to enhance profitability and productivity, for one-off costs totalling £60m-£65m in the period FY2025-FY2026, to drive £30m-£35m of annualised benefits in FY2027, with around a quarter to be realised during FY2026.
Guidance for the financial year to 31 July 2025 is for 4%-6% organic revenue growth and continued margin expansion. Headline operating cash conversion is expected to be in the low nineties percent given an increase in capex to around £110m.
Source: Bloomberg