17th Sep 2014 08:22
LONDON (Alliance News) - Smiths Group PLC raised its dividend marginally for the full year to end-July, although it saw results hit by the strength of sterling as growth in its John Crane, Smiths Interconnect and Flex-Tek businesses were offset by declines in Smiths Medical and Smiths Detection.
The technology group proposed a total dividend of 40.25 pence, up 1.9% from 39.50 pence in the previous year.
Smiths posted a pretax profit of GBP302.0 million in the recent financial year, 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.
Stripping out these exceptional costs, Smiths posted an operating profit of GBP504.4 million, down from GBP559.7 million.
Smiths said that the strength of sterling had "significantly reduced" its results, estimating a GBP43 million hit to its operating profit.
In the company's John Crane business, operating profit was up 2% at constant currency, boosted by the reopening of dormant refineries on North America's East Coast, and customer investments in shale development. Going forward, 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 to 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.
Smiths Medical saw profit fall 16% on a constant currency basis, as revenue was hit by US distributor destocking, 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 noted.
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, said 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 coming year as government capital spending remains constrained.
The company remains cautious regarding the healthcare, homeland security and defence markets as they are subject to government funding constraints, although it noted that "there are signs that the defence market is beginning to stabilise."
Going forward, the company said its strategy remains accelerating its medium-term growth, and repositioning its business through investment from its 'Fuel for Growth' programme, which is planned to produce GBP60 million in annual savings by 2017. The company incurred GBP27 million in costs for the programme during the year, which it said delivered GBP10 million in savings.
In the coming year it expects to incur costs of GBP38 million for the project to produce a total savings run-rate of GBP20 million a year.
Jefferies maintained its Buy rating for the company, 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.
Michael van Dulken at Accendo Markets was less positive on the Smiths Group results, saying: "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."
Accendo Markets does not have a rating for Smiths.
Shares in Smiths were trading down 4.5% at 1,289.00 pence Wednesday morning, the biggest faller in the FTSE 100.
By Hana Stewart-Smith; [email protected]; @HanaSSAllNews
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