Barclays initiates Smiths Group at 'overweight'

Barclays initiated coverage of diversified engineer Smiths Group at 'overweight', with an 1,800p price target as it highlighted material change under the current management team.

"Since Andy Reynolds Smith took over as CEO in 2015 we have seen a return to active management of the portfolio, an operational improvement seen through much improved cash dynamics and a much greater focus on organic growth," it said.

Barclays noted that cash flow has seen a material, positive change as the benefits of the focus on working capital, operational improvements and a reduction in pension contributions impact the business. In addition, it said Smiths has had clear improvement in free cash flow since the FY14 trough and now has a higher free cash flow margin than its peers for the first time since FY10.

"We see this as evidence that changes brought to the business post Andy Reynolds Smith becoming CEO are having an impact and Smiths Group is changing."

Barclays also argued that pension risks are diminishing, with the company reporting an accounting surplus for each of the last two fiscal years, while cash contributions are falling and the estimated buyout value for the three main schemes has fallen to around £1bn, or 2.2x FY17 free cash flow.

"This is less than 20% of Smiths’ market cap and so we feel the pension is much less of an impediment to changes, and cash flow, at Smiths than in the past."

At 1250 GMT, the shares were up 0.7% to 1,534.50p.