Smiths Group's final results fall short of expectations

17th Sep 2014 07:06

A second-half return to form at its medical division helped engineer Smiths Group group ratchet its revenues back on a par with the prior year, though they still fell short of City expectations.With a 5% impact from foreign exchange headwinds and a small disposal dragging the numbers lower, underlying revenue was down 5% on a reported basis at £2.95bn in the year to end-July.Reported pre-tax profit shrank 23% to £302m due to the forex effect and a 6% fall at the underlying level.Earnings per share declined 12% to 81.8p versus a consensus of 82.5p. The dividend was raised by three-quarters of a penny, or 2%, to 40.25p, as expected.While medical, the second-largest division by revenue, improved in the second half, both it and the detection division delivered negative growth, offsetting the rise in organic revenue and headline operating margin improvement at John Crane, Smiths Interconnect and Flex-Tek.Chief executive Philip Bowman remained concerned about both healthcare and defence sectors due to their being subject to government funding constraints, although signs were seen that defence is “beginning to stabilise”.For the new financial year, management will continue to take costs out of medical to reinvest in growth drivers, while defence is predicted to deliver flat revenues in the coming year, though margins should improve.Interconnect should enjoy “modest” overall growth but with margins flat, suppressed by investment, with Flex-Tek expected to see improvements in several of its many marketsThe record high order book at John Crane is expected to support sales growth from the midstream and downstream segment in the first half, though revenue growth is expected to be sub-par because of "challenging upstream market conditions and some manufacturing constraints" which are predicted to improve slightly as the year progresses.Investec observed that Smiths' broad collection of several large businesses, each offfered "challenges and also with recovery potential".Although analysts expect some progress in the new financial year, the muted outlook statement "suggests that this will be another year of hard work, with payback likely over a longer period", leading to slight trimming of estimates.Killik said the group remains well placed to benefit from growth in energy demand, the need for new fuel-efficient aircraft, increased US residential construction and investment in wireless networks.Shares in Smiths were down 4.5% at 1,289p by 08:23 but recovered to near par later in the session.