A profit warning from engineering conglomerate Smiths (SMIN) has troubled the market, sending the shares down 4.5% to £13.28. Its Detection business, which sells products to protect airports and ports from chemical agents, explosives and radiation, has suffered from contract cost issues. This will drag down group operating profit by £15 million below current expectations.
Investec analyst Michael Blogg calculates that this profit reduction equates to a 2.7% downgrade to forecasts. To see the share price fall by a greater amount would suggest that investors are worried about the company's systems and ability to properly forecast contract income.
Smiths said three contractual commitments dating back before 2010 are anticipated to be 'materially adverse to previous expectations.' It is also making provision for costs attached to undisclosed legal disputes. The £5.4 billion cap also says it hasn't managed to claw back all the overheads at new manufacturing sites.
Blogg remains a buyer of the stock with a £15 price target, saying the group still has high-quality operations, most of which are performing well against mixed market conditions.
Smiths earlier this year disappointed with its Medical division, which supplies hospitals and emergency services with equipment. The group revealed in May that it had been approached by an undisclosed party about buying the division, thought to be worth between £2 billion and £3 billion. It rejected an approach two years ago from private equity group Apax for about £2.45 billion.
The conglomerate hasn't made a public statement about the potential Medical arm sale since May and there's no news in today's update, apart from saying all divisions except Smiths Detection are trading 'broadly' in line with the 24 May interim management statement. The City will expect comment from the board about any disposals when full-year results are published on 18 September.
