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Smiths Group profit drops, says FX headwinds to persist
Smiths Group tumbled on Friday after it posted a 12% drop in interim profit as revenue fell and while the engineering company did reiterate its guidance for the year, it also warned that forex headwinds would persist.
In the six months to the end of January 2018, pre-tax profit dropped to £217m from £248m in the same period a year ago, missing expectations of £245m. Revenue was down 4% to £1.5bn as it took a hit from adverse foreign exchange translation, while on an underlying basis, it was pretty much flat.
Meanwhile, operating profit declined 11% to £247m, impacted by programme phasing in the detection business and higher research and development costs in the medical unit, associated with the programme of new product launches.
Headline basic earnings per share were down 11% to 40.4p. However, the company lifted its dividend by 1.8% to 13.80p a share and reaffirmed its 2018 outlook.
Smiths said the John Crane division returned to growth, while Smiths Detection continued to achieve good growth in air transportation, although this was offset by programme phasing in the non-aviation segments. At Smiths Interconnect, sales dropped following a period of significant strategic and structural change.
Chief executive Andy Reynolds Smith said: "The outlook for 2018 is reaffirmed (on a constant currency basis). The group's current trading, the strong order books in John Crane and Smiths Detection, as well as the substantial ongoing programme of new product launches in Smiths Medical, support our confidence that the group's growth rate will accelerate over the balance of the year. At current rates, foreign exchange will remain a headwind for the full year.
"Over the medium-term, we are confident that we will achieve organic revenue growth above our chosen markets, which in aggregate are growing 3-4% annually. This is founded on our strategy to maintain and continue to develop leadership positions in attractive growth markets, our increasing investment in technology and new products, our established operating model for excellence, and our strong financial framework. In parallel with our continued active portfolio management this will deliver long-term sustainable growth and attractive returns."
At 0915 GMT, the shares were down 10% to 1,380.50p.
Numis cut its stance on the stock to 'reduce' from 'add' and said the results are "a little disappointing".
"Whilst we see some of the softness, i.e. more investment in Medical as arguably positive, the overall tenure is still not generating organic growth. The markets have given the management team much credence but until more tangible results the shares on the current rating look a little rich."
Mike van Dulken, head of research at Accendo Markets, said lower sales and profits were made worse by the outlook statement, which suggested that FX headwinds are set to remain.
"This takes the shine off management's reiteration of 2018 guidance thanks to a strong order book, new product launches and confidence in group growth acceleration in H2. With markets expecting the UK's Bank of England to hike in May to temper inflation, the UK allegedly close to a Brexit transition deal, and President Trump keeping the USD on the back foot with his protectionist approach, investors are also factoring in even more upside for GBP/USD. A break above 2018 highs would extend the FX pair's damaging reversal from Brexit lows, eroding what was a nice translational benefit in the wake of the referendum."