Smiths Group PLC (LON:SMIN) has announced plans to spin off its medical division alongside a first quarter trading update that showed a drop in revenue.
The company said the proposed separation would allow it to focus on growing as an industrial technology group while giving Smiths Medical the freedom to capitalise on its investments and large programme of new product launches.
“This planned separation will strengthen both Smiths and Smiths Medical as they each focus on accelerating the execution of their plans and maximising the opportunities in their respective markets,” said chief executive Andy Reynolds Smith.
“Following our focus on operational improvements and increased investment, we believe it is now time to prepare the separation of Smiths Medical from the rest of the group.”
Demerger widely expected
The move follows a poor performance by Smiths Medical, which prompted the company to hive off the division’s sterile water bottling business to US medical device manufacturer Amsino Healthcare Inc. for US$40mln in September.
Smiths was in talks with ICU Medical Inc. regarding a potential merger with the medical arm earlier this year but the two were unable to agree on terms.
“The decision to separate out the medical division shouldn’t come as a surprise, it didn’t really fit with the rest of the engineering group whose interests range from airport security scanners to components for the aerospace and construction industries," said AJ Bell investment director Russ Mould.
“Full-year results published in September showed the medical arm to be one of the group’s weakest parts and this has been the case for some time."
First quarter revenues hit by weakness in medical and detection units
In a separate trading statement on Wednesday, Smiths posted a 1% dip in revenue in the three months to October as growth in its John Crane, Smiths Interconnect, and Flex-Tex businesses were offset weakness in Smiths Medical and Smiths Detection.
The company said the medical division’s revenues were hit by regulatory and contract challenges but these issues were “progressively abating” and the business was on track to return to growth in the second half.
READ: Smiths Group announces sale of sterile water bottling unit as it reports drop in profits
The phasing of orders hurt revenue in Smiths Detection, which supplies chemical, radiological, and nuclear detection systems, but the group expects a robust order book to lead to a stronger second half.
John Crane, which provides mechanical seals and filtration systems, saw an acceleration in original equipment orders and strong aftermarket demand.
Smiths Interconnect -- the division that provides electronic components, subsystems, microwave and radio frequency products to the aerospace, space, defence, medical and rail sectors - -delivered “strong growth” with a good performance in the space market.
The Flex-Tex unit that makes engineered components that heat and move fluids and gases for the aerospace, medical, industrial, construction and domestic appliance markets achieved “good organic growt”h, driven by heat solutions and flexible gas tubing.
Full year estimates maintained
Smiths left its full year guidance unchanged with underlying growth at least in line with the level reported in 2018. The group’s performance is likely to be weighted towards the second half.
The adoption of IFRS15 accounting measure this year has reduced revenue by £16mln and net assets by £1mln.
"While this guiding for expected improvement in the second half may temper investors’ enthusiasm regarding news of the proposed separation, we continue with our buy recommendation for investors seeking a balanced returned and willing to accept a medium level of risk," said Graham Spooner, investment research analyst at The Share Centre.
Shares rose 5.8% to 1,392p in mid-morning trading.