Rachel Reutter Long Smiths Group: Sohn London Conference ~ market folly

Thursday, January 10, 2019

Rachel Reutter Long Smiths Group: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Rachel Reutter of J O Hambro Capital UK Opportunities Fund who presented a long of Smiths Group (LON:SMIN).

Rachel Reutter's Presentation at Sohn London Conference

Perceptions of Smiths Group are stuck in the past. The management team that was appointed in 2015 has solved the pension overhang, shored up the balance sheet and now they are diverting cashflows into R&D to become market leaders in several businesses.

More recurring revenue type business is being done – 57% of revenues are from the aftermarket. Smiths has 17% operating margins. It has a diverse set of cashflows that are multi-product, multi geography, varied customers with multiple cycles.

The management are good allocators of capital. The balance sheet is strong.

Since 2015 Smiths has gone from being market leader in 60% of their businesses to 80%. The quality of the company is rising. Areas of market leadership include: airport security and particularly scanners. There are strong barriers to entry in this area because of trust and relationship issues involved in the security sector. Airmiles are set to grow at 5% per annum and the threat of terrorism seems to be ever present and becoming more sophisticated. Borders are understaffed and only 2% of containers are checked. Governments have no choice but to spend on security equipment, the underlying market is growing at 5% per year.

Other leading businesses include: John Crane, the maker of seals for the oil industry; Inclusion Systems, the maker of medical devices - 20% market share, 82% of sales are recurring.

Smiths is sensibly valued, FCF yield 6.5%, dividend 3.5%, cashflow is growing at 5% per year.

Reutter expects the medical division to be sold in the next few months. There is plenty of upside potential.

Be sure to check out the rest of the presentations from the Sohn London investment conference.

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