Separations can be long and painful, though in the end, once they’ve gone their various ways, each of the parties can be happier with life on their own. That is the plan with Smiths Group, the FTSE 100 engineer whose stop-start split with its medical devices division is set to culminate in a break.
There’s plenty to be resolved about how the separation will work: whether, for example, Smiths will retain a stake in its medical unit, spin it off in London or New York and when it might take place.
Confirmation, as of November, that the split is going be a reality at some point also has reignited talk that the engineering conglomerate, whose five businesses don’t obviously sit together, may part ways with more of them, in the process releasing even more potential additional value for investors. The options, certainly on the face of it, look plentiful.
Smiths Group was founded in 1851 by Samuel Smith as a family clock and watch-making business. Having moved over the decades into other areas, including plastics and industrial instruments, it changed its name to Smiths Industries in 1965. In its most recent guise, Smiths was formed in 2000 when it merged with TI Group, a high-performance engineer, although it has since shed much of the exposure to aerospace that accompanied this deal.
Its five divisions are diverse. Smiths Medical makes medical devices, including disposable syringes and catheters, and is the largest, accounting for 28 per cent of the group’s £3.2 billion of revenues last year. John Crane is a precision engineer that makes parts for industries ranging from oil and gas to pharmaceuticals to mining to pulp and paper; it accounts for about 27 per cent of revenues. Smiths Detection makes security systems, such as the scanners that passengers pass through at airports, and generates 25 per cent of revenues.
The rest comes from Flex-Tek, which makes components to heat and move fluids and gases, at about 11 per cent, and Interconnect, which specialises in microwave technology and antennae, on about 9 per cent. Both divisions still work in aerospace, among other industries.
It is to Smiths’ credit that it is in no hurry to effect its separation from Smiths Medical, which had a tough time of it last year adjusting to new European standards and also has yet to reap the benefits of substantial additional investment by Smiths and more than 20 product launches in the past three years.
The rationale for the move is also clear. Shareholders will be able to choose whether to stay exposed to a division that has acted as a drag on Smiths for years. Being listed separately also makes the prospect of a bidder emerging more likely and should remove some of the conglomerate discount attached to the group’s stock market valuation.
While it may be some way away, analysts have pencilled in a valuation for Smiths Medical of more than £2.9 billion, based on a multiple of about 18 times this year’s forecast profits. That equates to more than half the group’s present listed worth of £5.7 billion and demonstrates the weight of the argument that businesses can be worth more separated than combined.
It is not entirely clear what holds together Smiths’ remaining operations, save for an emphasis on technology and the importance of after-sales contracts. Each, though, has clear attractions, the structural growth of defence and security to name but one.
The stock market values Smiths shares, down 8½p, or 0.6 per cent, at £14.40 last night, at about 20 times historical earnings and its shares yield about 3 per cent. With plenty of growth potential yet to be unlocked, that is reason enough to own them.
ADVICE Hold
WHY Having returned to growth last year, there should be lots more value to come
Aberforth Smaller Companies
Some might say that small can mean perfectly formed; others, that safety lies in size. As its name suggests, Aberforth Smaller Companies Trust is committed to the charms of the little things.
The trust began life in 1990 and is one of three funds managed by Aberforth Partners, an investment manager based in Edinburgh. It invests exclusively in UK-listed companies worth no more than £1.3 billion and has a brief to beat the Numis Smaller Companies Index over the long term. At any one time the trust has about 80 holdings, spread pretty evenly across sectors, although it has very light exposure to technology, telecoms and utilities.
Just because it invests only in British companies doesn’t meant that the investment trust is all about domestic earnings. Indeed, at the last count its portfolio companies made about 41 per cent of their sales overseas, albeit down from 46 per cent during the first half of the year.
With Brexit and economic uncertainties knocking the stuffing out of company valuations last year, this was a deliberate move by Aberforth, which selectively pushed up its holdings in lowly rated stocks. Its biggest holdings are Urban & Civic, the property investor that owns assets including Princess Street in Manchester and the hotel at Stansted airport, and First Group, the bus and rail operator that runs Greyhound coaches in America and First Bus and First Rail in Britain.
Despite owning some companies with problems — such as the retailers Topps Tiles, DFS, Dunelm and Carpetright — the trust outperformed its benchmark during the first six months of last year, lifted its interim dividend by 5 per cent to 9.5p and returned £22 million to investors by buying back shares.
Shareholders will learn this month how it fared during the second half, although it has emphasised that its aim is to think in the long term. Here it’s done well: the shares, while down 14p, or 1.2 per cent, at £11.96 yesterday, have gained more than 1,130 per cent since listing, against almost 265 per cent for the FTSE all-share. Nevertheless, there’s no getting away from its heavy bias towards the UK, the fate of which is one big uncertainty for at least the next year, for companies of any size.
ADVICE Avoid
WHY Too exposed to the UK economy given uncertainties
