Smiths Group: Lower growth, lacking catalysts

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Smiths Group

Lower growth, lacking catalysts

Reinstating Coverage: UNDERPERFORM | PO: 2,400 GBp | Price: 2,642 GBp

Growth does not justify a premium valuation

03 August 2026

We reinstating on Smiths Group at Underperform with a 2,400p price objective, implying

c.10% downside. While management has successfully reshaped the portfolio through the

disposals of Detection and Interconnect, we believe this and the substantial buybacks

are now largely in the share price. Smiths trades at c.14x FY27E EV/EBITA, a c.10%

premium to UK peers and >15% premium to its own history, despite our expectation for

organic growth of only c.3.4% in FY26-28E versus c.5.5% for peers. We therefore prefer

faster-growing names such as Halma, IMI and Weir.

Portfolio benefits realised; growth becomes the focus

Following the divestments, we think investors will increasingly focus on growth, where

Smiths compares less favourably with UK peers. Exposure to US residential construction

and oil & gas midstream is significant, but limited to attractive markets such as LNG and

nuclear. We model average organic growth of c.3.4% in FY26-28E, below the c.5.5% UK

peer average. Nearer term, we also see downside risk to FY26 expectations. Following

flattish organic growth in 9M26, achieving guidance and consensus of c.2% requires an

acceleration to MSD-HSD% growth in Q4, which we view as unlikely.

Divestments strengthen quality, but investors know it

The disposals of lower-margin businesses Detection and Interconnect for c.GBP3.2bn

have created a higher-quality company and provide sizeable funds for the planned

GBP2.5bn share buybacks in FY26-28 (c.1/3 of MCAP). Also, the acquisition of DRC, has

shown management’s willingness to improve the growth profile. We expect operating

margins to move to >21% by 2028E.

Improved quality deserves smaller discount, not premium

Valuation already reflects improved quality and planned shareholder returns. Smiths

trades >15% above its 10-year history and c.10% vs UK peers. Improved quality justifies

a narrower discount than in the past, but lower growth still warrants a discount to peers

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