17th Sep 2014 12:49
LONDON (Alliance News) - Smiths Group PLC saw its shares fall Wednesday after it reported lower pretax profit for its last financial year, as its medical and detection businesses continued to be hit by lower government spending, particularly in the US, and the strength of sterling also continued to weigh on revenue earned overseas.
Smiths has been struggling to grow the detection and medical businesses for a couple of years as government customers became more spend-thrift in the wake of the financial crisis and ensuing economic downturn. It is trying to grow its other, consumer-facing, businesses to offset the slowdown in the detection and medical divisions.
Smiths posted a pretax profit of GBP302.0 million for the year to July 31, down from GBP395.7 million the year before, as revenue fell to GBP2.95 billion, from GBP3.11 billion and it posted higher exceptional and amortisation charges of GBP126.8 million, compared to GBP73.2 million a year before. These exceptional costs included a GBP28.8 million charge related to restructuring, and litigation provisions related to its Titeflex Corp and John Crane businesses.
Smiths said that the strength of sterling had "significantly reduced" its results, estimating a GBP43 million hit to its operating profit. Its operating profit excluding exceptional costs fell 10% to GBP504 million, from GBP560 million, but the decrease at constant exchange rates was only 6%, it said.
"We are cautious about sectors such as healthcare and homeland security, which are subject to government funding constraints, although there are signs that the defence market is beginning to stabilise," the company said in its outlook statement.
It said it remains focused on bolstering its medium-term growth and repositioning its business by using the money it is saving in a cost cutting programme to invest in growth areas and developing new products.
It is targeting GBP60 million of annual savings by 2017 under its so-called 'Fuel for Growth' programme. It delivered GBP10 million of annual savings in its last financial year, but this cost it GBP27 million. In the current year it expects to incur costs of GBP38 million for the project to produce a total savings run-rate of GBP20 million a year.
Despite the latest profit fall, Smiths Group raised its dividend marginally. It proposed a total dividend of 40.25 pence, up 1.9% from 39.50 pence in the previous year. Its dividend policy is to maintain a dividend of about 2.5 times earnings over the medium-term, but said it was prepared to be flexible to take account of short-term impacts like foreign exchange movements.
Some analysts said the sweetened dividend wouldn't be enough to convince some investors.
"A meagre 2% dividend hike isn?t being considered good enough reason to hang around with revenue declines and margin erosion so prominent, even if problems had been flagged up in May," said Michael van Dulken at Accendo Markets.
However Jefferies maintained its Buy rrecommendation on the stock, saying it believes the company "does not need to score 100% to be good value; four out of five plus some recovery at Detection will likely do."
"Increased government spending on health and defence & security was always likely to be late-cycle, in our view. We see some signs of improvement in areas such as defence and note Detection has secured some significant contracts, but the backdrop in Medical remains challenging," Jefferies said.
"Nonetheless, the group?s effort to rebalance its revenue and profit streams away from government to commercial customers is clearly working ? slowly but surely - in our view. We venture that both we and Smiths find it frustrating when that progress is disguised by left-field events like the medical device tax or by poor contract execution in Detection," Jefferies said.
Operating profit excluding exceptional costs fell 16% at Smiths Medical, as revenue was hit by further US distributor destocking in the first half, under-performance in emerging markets, and tough trading in developed markets. The business saw an improved second half, the company said, although it noted this was against a weak comparison period. The division also was disrupted by an approach to acquire the business, Smiths said. Various media reported in May 2013 that Smiths had been approached about selling the unit.
The company expects conditions for Smiths Medical to remain challenging in the medium term, although it expects the launch of new products into its infusion range in China in 2015 to improve its competitiveness.
Smiths Detection saw revenue fall 5% at constant currency, as demand weakened in the transportation, ports and borders and military markets. Smiths said that the operating environment for the business has undergone "major changes" in the past five years, and whilst it has been slow to adapt to these changes, it has since strengthened its management team to address this. The order book in this division is similar to the previous year, and it is expected to deliver flat revenues in the current year as government capital spending remains constrained.
Operating profit excluding exceptional items rose 2% at John Crane business, boosted by the reopening of dormant refineries on North America's East Coast, and customer investments in shale development. The growth would have been 8% if currencies had remained constant.
The company expects John Crane's high order book to support sales growth in the first half of 2015, although it expects revenue growth to be below its medium-term operating range as market conditions remain challenging.
Flex-Tech also performed well, with revenues up 3% at constant currency, boosted by the recovery of the US residential construction market, and sales of speciality heating elements and flexible hoses. Going forward, Smiths was optimistic for Flex-Tech's future, citing continuing demand in the aerospace market, although it warned that growth in residential housing could be hampered by higher home prices, stricter lending practices and higher interest rates.
Shares in Smiths were trading down 5.4% at 1,275.95 pence Wednesday afternoon, the biggest faller in the FTSE 100.
By Hana Stewart-Smith; [email protected]; @HanaSSAllNews
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