Smiths Group is the UK Index loser this morning, -10%, after reporting lower H1 sales (-4%; -1% underlying), profits down -12% (-3% underlying; higher Medical R&D, Detection programme phasing, acquisition integration) and free cash flow down a very sharp -36%. This has only allowed the group to increase the interim dividend by 1.8%, less than the 2.2% growth offered this time last year and the 3.3% boost to the final dividend last Oct. This is in contrast with many other corporates, handing out bigger percentage increases in an effort to keep shareholders onside amid market uncertainty and share price declines.

Matters, however, are made worse by the outlook statement (always key) suggesting FX headwinds are set to remain. This takes the shine off management’s reiteration of 2018 guidance thanks to a strong order book, new product launches and confidence in group growth acceleration in H2. With markets expecting the UK’s Bank of England to hike in May to temper inflation, the UK allegedly close to a Brexit transition deal, and President Trump keeping the USD on the back foot with his protectionist approach, investors are also factoring in even more upside for GBP/USD.  A break above 2018 highs would extend the FX pair’s damaging reversal from Brexit lows, eroding what was a nice translational benefit in the wake of the referendum.

Shares off their lows, but not without a bearish test of Nov 2016 support at 1365p, meaning there could be more downside towards Aug/Sept 16 lows of 1330p. In terms of share price recovery potential, the risk is that the 1445p highs of the day, which correspond with breached Dec support, will now become meaningful resistance.

Mike van Dulken, Head of Research, 23 Mar 2018