Smiths Group: energy transition should help UK conglomerate to shine

Receive free Lex updates

We’ll send you a myFT Daily Digest email rounding up the latest Lex news every morning.

Smiths Group started out more than 170 years ago as a London jewellery shop. More recently, the maker of seals and airport scanners has lacked sparkle. When he took over in 2021, Smiths boss Paul Keel needed to reverse a decade of anaemic revenue growth. Full-year results on Wednesday revealed some success in polishing the industrial conglomerate.

Smiths’ two biggest businesses by revenue are John Crane and Smiths Detection. The former makes highly engineered seals, in demand from energy companies keen to reduce emissions and leakage. The detection unit profits from airports upgrading their scanners as requirements for passengers to remove liquids from their hand baggage are phased out. 

Both drove a forecast-beating 11.6 per cent rise in annual revenue to £3bn, excluding foreign exchange fluctuations. Operating profit rose 13 per cent to £501mn, despite a drop at Smiths’ Interconnect business. This sells products for the depressed semiconductor market. 

Revenue growth in the next year will slow to 4-6 per cent, in line with targets. Still, Smiths trades at a discount to rival specialist engineers at an enterprise value-to-forward ebitda multiple of just over 10 times. Halma and Spirax Sarco trade at around 17 times.

Closing that gap will not be easy. Two years ago Smiths slimmed from five to four businesses when it sold its medical unit for $2.7bn. Keel shows no appetite for a further break-up. He could squeeze out more costs to get operating margins up. At 16.5 per cent in 2023 that is below the 18-20 per cent goal.

Longer-term, John Crane in particular has good prospects, as the US is its biggest market where the Inflation Reduction Act is making a difference. Its seals are vital for the energy transition, used for hydrogen production and carbon capture and storage.

Smiths offers decent value, but needs more growth. A focus on its energy transition-related John Crane business offers the best chance for that.

*The text has been changed to reflect that John Crane and Smiths Detection are the biggest units by revenue.