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Investing.com -- RBC Capital Markets analysts have expressed a cautious outlook on Smiths Group ’s (LON:SMIN) stock, citing limited upside potential despite the company’s decision to pursue a partial breakup.
While the shift has led to a revision of the sum-of-the-parts valuation to 2,100 pence per share from 1,750 pence per share, analysts believe the stock is likely to move sideways in the near term.
The London-listed industrial conglomerate announced plans to divest its Interconnect business, followed by the separation of its Detection unit through either a sale or a demerger.
This marks a departure from Smiths’ longstanding commitment to a diversified industrial structure, a strategy previously defended by the former CEO.
The move is seen as a reflection of a change in leadership under CEO Roland Carter, who took over in March last year, as well as the influence of a new chair appointed in September 2023.
RBC analysts acknowledged the market’s positive initial reaction to the announcement, with shares climbing following the news.
However, they argue that the upside from the restructuring appears largely priced in at current levels.
They maintain a “sector perform” rating on Smiths, noting that while the breakup could unlock value, the quality of assets being sold and lingering uncertainties around valuation could limit further gains.
The revised price target is based on an updated SOTP valuation that accounts for foreign exchange adjustments and an expanded share buyback program, which has been increased from £150 million to £500 million.
While a full sale of the company could push the valuation to around 2,500p per share, RBC views this as an optimistic scenario rather than a base case.
One of the key concerns raised by analysts is the timeline of the asset sales. The disposal of Interconnect is expected to be completed by the end of the year, while the timeline for the Detection unit remains less clear, with regulatory and security considerations potentially complicating the process.
Additionally, details regarding the balance sheet structure of the remaining entities and the associated central costs post-split remain sparse.
From a valuation perspective, Smiths is currently trading at 13 times its expected 2025 earnings before interest, taxes, and amortization, compared to 14 times for Rotork (LON:ROR), a peer company with a similarly high-margin business.
The analysts argue that much of the potential upside has already been realized, leaving limited room for further re-rating unless the company accelerates the process or secures higher-than-expected valuations for the divested units.
Shares of the London-based company were down 2.4% at 05:17 ET (10:17 GMT).