A 30p special dividend to accompany in-line full-year results from engineering conglomerate Smiths Group (SMIN) gets a warm reaction from investors – up 3.5% to £14.24 – helping to repair the damage wrought by July's profit warning.

The stock is now back above the level it was at when Smiths warned cost issues relating to contracts in its Detection business would hit group operating profit by £15 million (17 Jul). The £5.4 billion cap has met revised expectations with its results for the 12 months to 31 July but there are question marks over its future strategy which it has not really addressed.

Last month (2 Aug) it pulled the sale of its Medical unit. The company revealed in May it had been approached by an undisclosed party about buying Medical – thought to be worth between £2 billion and £3 billion – having rejected a £2.45 billion bid from private equity firm Apax two years ago.

This prospective deal had been seen as the first step in the break-up of the group – which encompasses five divisions: John Crane – which serves the oil and gas and power generation industries; Medical – a provider of vital care products; Detection – which protects airports and ports from external threats; Interconnect – a signal, power and microwave solutions business; and Flex-Tek – which specialises in fluid management.

Looking at the underlying numbers in a bit more detail, pre-tax profits are up 20.1% year-on-year to £442 million on revenue ahead by 2% to £3.1 billion, with the ordinary divided up 4% to 39.5p. Free cashflow of £237 million helped reduce net debt by 6% to £744 million and this explains why management felt able to make the one-off £118 million return to shareholders. As anticipated margins expanded in John Crane, Interconnect and Flex-tek but declined in Medical and Detection.

In response to the prelims, Investec analyst Michael Blogg reiterates his 'buy' recommendation and increases his target price from £15 to £15.90. He comments: 'We believe that the group is fundamentally undervalued and today's statement might begin to wake up investors to the potential, even without major disposals.'

Numis is more cautious, advising clients to 'hold' the shares with a target price of £14, but adds: 'The shares should find support at these levels given that it remains a break-up story and trades at a sector discount.'


Issue Date: 18 Sep 2013