Pre-tax profit for the six months to 31 January falls 20% to £132 million on revenue down 2% to £1.4 million. Excluding one-off items profits are off by a more modest 4% at £215 million. The dividend is up 2% to 12.75p. Group margins are under pressure – down from 17.1% to 17% - and currency is likely to remain a headwind for the company. Management signal continuing strength in sterling will have a 4% to 5% impact on full-year earnings.
The company pulled a sale of its medical services unit last August. The business is thought to be worth between £2 billion and £3 billion and accounting for a quarter of group sales. It blames a 4% decline in revenues from this division on the distraction created by the sale process. A large pension deficit is seen as an impediment to disposals. Smiths rejected a £2.45 billion bid for the unit from private equity firm Apax in 2011.
Investec analyst Michael Blogg retains his 'buy' recommendation but puts his £15.50 price target under review. 'The outlook for the second half looks better, if patchy, but the currency headwind is strengthening, which is already reflected in estimates. Until discount rates rise and allow the group to sell the Medical operations (which are struggling at the moment), we do not expect much drama. Nevertheless, the group is probably still undervalued on a sum-of-the-parts basis and we remain positive.'
Edison's Roger Johnston comments: 'Smiths' interims were impacted as expected by the challenging conditions in government markets, offsetting gains in commercial and pushing group revenues down by 1%, while operating profit declined by 2% and earnings per share by 4%. The main culprit once again was Medical, where already weak procedure volumes were exacerbated by distributor destocking and the full impact of the medical device tax in the US.'