I reckon FTSE 100 diversified industrials conglomerate Smiths Group (LSE: SMIN) is too cheap to ignore right now. Its earnings multiple is reasonable and its dividend is decent, but what particularly draws me to the stock is its discount to the sum of the value of the group’s parts.
These same characteristics apply to mid-cap Ocean Wilsons Holdings (LSE: OCN). The larger of this company’s two subsidiaries is one of the leading port, maritime and logistics operators in Brazil. Its other subsidiary owns an eclectic portfolio of international investments.
Progress under new management
Smiths Group has five operating divisions that serve diverse markets. Following a change of management in 2015, the company has been rationalising its portfolio to focus on markets with good growth prospects and where it is, or can be, a top three player. To this end, it’s sold nine businesses and bought four over the last two years and reckons the group’s positioning in attractive markets has moved from 60% to 80%.
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In the medium term, once its ‘fix-or-sell’ strategy is complete and with the investment it’s been making in its favoured businesses, management is confident the group will achieve organic annual revenue growth above the 3%-4% of its chosen markets. I’ve been impressed with the progress made by the new management so far. The shares reached a high of over 1,800p during the summer and I reckon the current price of nearer 1,500p, which is 15 times current-year forecast earnings with a 3% dividend yield, could prove a bargain, if management delivers on its medium-term target.
Value-unlocking options
It’s also clear that the board of directors isn’t averse to a more radical unlocking of value for shareholders than by the piecemeal disposals seen to date. The group recently discussed (but ultimately turned down) a reported £2.8bn offer for its medical division from US firm ICU Medical. Analysts’ sum-of-the-parts valuations of Smiths Group vary, but the approach by ICU clearly shows there’s value there. The medical division contributed 28% to group revenue last year, while the mooted ICU offer for it was equivalent to 47% of Smiths’ current £5.95bn market cap.
The way I see it, whether management delivers (with or without a major disposal), or whether management falls short and activist investors push through a value-unlocking break-up of the group, the stock is currently cheap and I rate it a ‘buy’.
Additional value
Ocean Wilsons currently trades on a slightly lower earnings multiple and higher dividend yield than Smiths Group — a rating little changed from when my colleague Peter Stephens extolled its capital and dividend growth prospects last autumn. With its main subsidiary (Wilson Sons) listed on the Sao Paulo stock exchange and much of its portfolio of international investments being traded funds (such as Findlay Park American), Ocean Wilsons’ sum-of-the-parts valuation is a fairly straightforward matter. I reckon it’s currently around 1,500p, compared with a share price of 1,045p.
Furthermore, there may be additional value within the Wilson Sons subsidiary. Management is currently looking at strategic options for the container terminal part of the business. This is with a view to maximising shareholder value in light of some recent buyers in the sector willing to pay high prices. However, even if nothing comes of this particular avenue of exploration, Ocean Wilsons is another stock I see as cheap. I’d be happy to buy today.
