Smiths Group: When Philip Bowman joined as CEO, in
December 2007, most investors saw his prime remit as the sale of the group,
either as a whole or in bits. This was a fair assumption as Smiths was an
uneasy mix of activities and Bowman’s previous two jobs had been the sale of
Allied Domecq and Scottish Power. Now, as he heads for retirement at the end of
the year, the group is also looking for a new CFO as Peter Turner departs for
‘other opportunities’. Whilst the 2007/8 banking crisis greatly reduced the
appetite and firepower of financial and corporate buyers, the great failure is
that the group is substantially the same beast as when Bowman arrived. So now
it is a case of who next and what next.
In these interims to 31st
January 2015, reported revenue is down 2% and operating profit down 5% on a
60bps margin squeeze, with a currency headwind partly to blame. This drops
through to eps of 38.5p, down 3% and a dividend of 13p (up 2%). Operating cash
flow conversion was 88%, but debt crept up from £804m to £929m due to higher
dividends, pension costs and forex. The pension hole grew from £236m to £338m,
as falling yields hurt. Across the five divisions, Medical made operating
profit progress, as did Flex-Tek, whilst John Crane marked time and Detection
and Interconnect fell back. Getting all five cylinders to fire at once has been
the elusive challenge for Bowman and remains so. The mixed outlook for the
second half sees Medical likely to slow, Interconnect to be below last year’s
second half, John Crane to see the effect of the oil price collapse, Flex-Tek
to grow and Detection to pick up against soft comparatives.
The strategy talks about targeting revenue growth, “as we seek to re-position”
the group. I’m not quite clear how, ahead of major boardroom changes, this will
be a year of significant achievement or change. It feels like a case of wait and see
for news of new appointments, which will no doubt presage a strategic review a
few more months down the line. For now the shares are 1160p, which on eps of
(at a stretch) 80p is a PE of 14.5x. Long-term dividend cover is targeted to be
around 2.5x, but is nearer 2x at present. So a 40p dividend would be an
acceptable yield of 3.5%. So, as is often the case with Smiths, the shares look
OK value, but the real spice will only come with a new boardroom team that excites
the company and the shareholders. (Neil Cumming, 18th
March 2015)
These comments are not a personal
recommendation to deal. Any investments can fall as well as rise in value, so
you could get back less than you invest. I may have a financial interest in
some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk Twitter: @DividendPower
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