Bottom Line: Smiths proves City wrong

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The Independent Online
THE MARKET has clearly been worried about Smiths Industries' dependence on the aerospace market, pushing its shares down 15 per cent relative to the market in the past year.

Yesterday's results show their concern was overdone. True, aerospace profits fell from pounds 43.8m to pounds 40.5m as civil aircraft orders continued to decline and governments squeezed defence spending. But the downturn was less severe than the market had feared, and while margins were squeezed they remain at a healthy 10.3 per cent.

Roger Hurn, chairman and chief executive, is confident that airlines will eventually return to profit and start ordering modern, efficient fleets, while the US defence review has confirmed three projects in which it has an interest. But he admits UK defence cuts could hurt and is as uncertain as anyone else about when the upturn will come.

Any disappointment over the aerospace performance was more than compensated for by a 44 per cent jump in profits from the medical systems business to pounds 41.3m, taking over as the group's largest profit contributor. That was partly due to acquisitions but about half was organic and Mr Hurn expects that to continue this year.

Margins rose from 21.4 to 22.8 per cent as the sales force was able to promote a wider range of products - although there must be a question over whether these are sustainable in the longer term.

Perhaps the best indicator of Smith's performance is its cash flow - pounds 121.2m from operations compared with pounds 100.4m last time - leaving it with pounds 34m ( pounds 120m) in the bank despite the pounds 124m cost of acquisitions.

Overall, profits rose 2.3 per cent to pounds 104.6m while earnings rose in line to 23.9p and the dividend is increased by 0.6p to 11.85p. Having proved the City wrong, Mr Hurn had the satisfaction of seeing the shares rise 39p to 394p. On upgraded forecasts of pounds 117m for the current year, that puts the shares on about 16 times earnings. The quality of last year's performance means there is more to go for.