Smiths Group rules out break-up as profits rise
The new chief executive of Smiths Group, the 165-year-old engineering group that started out as a jewellery shop and played a part in the first test-tube baby, reversed his predecessor’s plan break up the company.
The group — one of Britain’s last remaining engineering conglomerates, with a diverse exposure to markets including medical devices and petrochemicals — has long been viewed by City analysts as a candidate for dismantling.
But Andrew Reynolds Smith, who took the helm less than six months ago, said this was not on his agenda.
“I’m not here to break up the company. I’m here to build it and take it forwards,” said Mr Reynolds Smith, who added that he had support from investors.
“We’ve had an extensive consultation with shareholders and what they want is sustainable, long-term value. An important part of that is a well-run, high-performing business which is growing.”
The comments put an end to what many people saw as the core mission of Philip Bowman, his predecessor, whose attempts to make significant disposals were thwarted by factors such as the company’s big pension deficit and the financial crisis.
The pensions deficit has since been vastly reduced — and Mr Reynolds Smith said his focus was on expanding the business organically into new geographies.
“I come in at a time with a very good platform to build on,” he said. “For a group such as Smiths, [having] less than 15 per cent [of sales] in high-growth economies and less than 4 per cent of revenue in China is too low”.
Smiths floated on the London Stock Exchange days before the outbreak of the first world war and today makes products ranging from mechanical seals for energy installations to airport security scanners.
Mr Reynolds Smith said he wanted “after-market” services, which include maintenance and replacements and are touted as more resilient than equipment sales, to contribute more than their current half share of group revenue.
Smiths revealed a 28 per cent increase in pre-tax profit to £168m for the six months ending January 31. This was down to reduced charges for items such as restructuring, asbestos litigation and writedowns on acquisitions.
However, in a reflection of the malaise surrounding the wider engineering sector, Smiths’ underlying earnings tumbled by 9 per cent to £189m on the company’s preferred measure of headline pre-tax profit. Revenue fell 3 per cent to £1.37bn.
This was largely because of difficulties at its John Crane division, which makes equipment for the oil and gas sector, and accounts for more than one-third of group operating profit.
A sustained rout in crude prices — illustrated by the benchmark Brent indicator again falling below a threshold of $40 a barrel this week — has led energy majors to scrap billions of dollars worth of investment plans. Smiths joined the growing ranks of UK-listed manufacturers, such as Weir and IMI, which have been hit by the commodities slowdown.
There was one bright spot as Smiths Detection — which makes security devices such as explosives detectors — enjoyed a 38 per cent rise in underlying operating profit on revenues up 4 per cent.
“Today’s interim results are better than we expected,” wrote Michael Blogg of Investec in a note to clients.
Shares in the company were down 3 per cent on Wednesday at £10.47. Management increased the interim dividend by 2 per cent to 13.25p per share as basic earnings per share came in at 32.8p.
In a sign of the diminishing stature of engineering groups among investors, Smiths is being relegated from the FTSE 100 index of blue-chip companies.