View from City Road: Smiths pilots successfully through turbulence

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The Independent Online
The current slump in the civil aerospace market is as dramatic as its heady rise in the 1980s. Coinciding as it has with defence delays and squeezes, it has prompted UK aerospace equipment manufacturers, as the Commons Trade and Industry Committee heard yesterday, to clamour for government help.

World airlines have lost dollars 12bn since the invasion of Kuwait by Iraq in 1990 and are forecast by Airbus Industrie's researchers to lose another dollars 3.3bn this year, so are unlikely to be stepping up their aircraft purchases.

Roger Hurn, chairman and chief executive of Smiths Industries, which supplies instruments and controls for the Boeing 737, felt able, however, to forecast a significant recovery in the market later this decade. This assumes that airline finances improve and pressures to retire aircraft because of age, noise levels and fuel efficiency are irresistible.

Recent research by SG Warburg Securities suggests that this 'retirals bubble' may not be as certain as many in the aerospace industry would like to think. Fitting new engines and so-called hush-kitting could provide a much cheaper but still acceptable alternative to new aircraft purchases.

The brokers forecast that new aircraft deliveries will fall from 834 in 1991 to 561 this year and a low point of 425 in 1995, with only a modest recovery thereafter. In particular Warburg thinks that Airbus is too complacent about growing production rates, based on deliveries of the new A330/40, and will have to announce cuts.

Shares in aerospace companies have suffered so far this year as the gloom has deepened. Smiths Industries is no exception, its shares having underperformed the market by 20 per cent until yesterday's interim results. These helped to remind investors why Smiths is rightly regarded as one of Britain's highest- quality companies and left the shares 17p higher at 347p.

Despite the severe slump in aerospace, Smiths' pre-tax profits, excluding exceptional items and currency translation gains, were only 6 per cent lower. The company's inspired strategic move into single-use medical products, now its largest contributor after a 39 per cent profits rise, almost made up the gap. With some help from a tight squeeze on working capital, it generated surplus cash of pounds 33.5m before acquisition spending, justifying a 5 per cent dividend rise.

It sees Hillary Clinton's healthcare reforms as potentially positive for its low-cost medical products. And, even though aerospace is now in the mire, Smiths can look forward to the introduction of the Boeing 777, where it is an important supplier, in a couple of years. Assuming pre-tax profits either side of pounds 100m in the year to July, a prospective p/e of 16 and a yield of 4.3 per cent still look good value.

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