Business Strategy and Outlook
Both of JBT’s segments will benefit from growth in the global middle class. The middle class will approximately double by 2030, and the Asia-Pacific region will be a significant contributor to that growth. This helps JBT FoodTech because per capita meat consumption in APAC has traditionally and significantly lagged that of Europe and North America. North America’s per capital meat consumption is about three and a half times that of APAC, but the gap narrows during the five-year explicit forecast. Overall global meat consumption is also on the rise, as people have become more conscious of protein intake in their diet. The ready-to-eat market will safely grow in the high single digits over the medium term. Young consumers prize this type of food for convenience and as an easy alternative to everyday and conventional three-meal dining. Offsets to protein technology forecast include a rising prevalence of livestock disease. Furthermore, not all APAC countries, like India, will converge toward Western dietary trends. Nevertheless, China will remain the single-biggest market and should account for nearly 30% of incremental demand.
Liquid foods packaging trends should benefit from advancements in packaging standards, escalating demand for packaged foods generally, increased e-commerce, as well as high demand for eco-friendly and lightweight packaging. JBT should benefit from consumer preference for environmentally friendly packaging options since its solutions can cut down on waste, among other interventions. Additionally, the air cargo growth will be a strong driver for JBT’s airport equipment, along with general infrastructure spending for aging equipment. Also, the ecommerce market’s size will greatly increase over the medium term and that will boost air cargo demand. Finally, getting passengers on board safely has garnered increased attention among airport authorities in recent years. This trend will resume as global air travel continues to recover
Financial Strength
JBT is on decent financial footing and once again assigned the firm a moderate credit risk rating. As of the end of 2021, net debt/EBITDA was nearly 2.5 times, in line with multi-industry peers, but elevated relative to historical levels. That said, the firm has relatively low capital expenditures requirements (nearly 3% of sales), and free cash flow conversion sits at about 150% after a paltry mid-60s in 2019. It is not expected a repeat of 2020 levels, strong free cash flow conversion over the long term, with greater linearity in the conversion rate. The conversion will dip below 100% in 2022. As of the end of 2021, the interest coverage ratio (EBIT/interest expense) remains over 18 times, and JBT can service its financial obligations over the long run. As of the end of 2021, the firm’s pension fund was underfunded by $56 million, which reduces the fair value estimate by $2 per share. Long-term debt was nearly $675 million as of the end of 2021 (the firm has no short-term debt), versus cash on hand of nearly $80 million, of which about 75% is unrestricted and not needed to operate the business.
Bulls Say’s
- JBT will benefit from the consumer preference for value- added foods, including clean labels and organics.
- The market fails to appreciate the positive impact from the commercial aerospace recovery and the ensuing operating leverage JBT will enjoy from a return of volume.
- After taking a pause during the uncertainty of the pandemic, JBT will likely look to deploy capital in M&A once again.
Company Profile
JBT is a mid-cap diversified industrial conglomerate that spun out of FMC Technologies in August 2008. Over half of JBT’s sales are made in the United States. The firm operates through two segments: JBT Foodtech and JBT Aerotech. Foodtech provides both customized and turnkey industrial solutions for the food and beverage industry, including a large variety of protein processing and packaging solutions, as well as fruit and juice extraction and ready-to-eat solutions. Aerotech sells solutions to airport authorities, passenger airlines, airfreight firms, and defence contractors, among others. These solutions include gate equipment, as well as commercial and military cargo loading, aircraft dicing, and aircraft ground power and cooling system products
(Source: MorningStar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Business Strategy and Outlook
Smiths Group is a collection of industry-leading niche businesses, each producing admirable margins and returns; however, growth across the group is inconsistent, with different divisions enjoying periods of strong demand but at disparate times. Research and development spending as a portion of sales has increased by 50 basis points over the past few years. However, to accelerate group-level revenue growth, several innovations winners–not a single one–are likely necessary, given the breadth of products across the businesses. The innovation cycle for each business is also likely several years, and the fruits of the recent ramp-up in spending have yet to be seen. That said, a few of these product categories, particularly in security and safety, have emerging technology potential that could lead to new market opportunities. Management sees a potential GBP 200 million-250 million in gross new revenue opportunities in the medium term. The net number will be likely lower after considering cannibalization of existing products by new product rollouts. Smiths Detection is the division with the greatest potential to propel the group, as it offers security screening equipment with a potential addressable market beyond its current focus. The division currently specializes in screening equipment for airports and ports, mainly supplying to governments. The United States is an important medium-term end market for this equipment, and it is likely to go through a multiyear upgrade program, swapping out X-ray equipment for CT scanners. Smiths has a record of supplying equipment to the Transportation Security Administration and has secured previous CT orders from the agency.
Of the other divisions, John Crane is the most important cash flow driver, with a high portion of recurring revenue and an entrenched competitive position as the number-one supplier globally of mechanical seals. It faces a challenge over the coming years of managing likely declining revenue from its oil and gas customers with new products and end-market growth. Its deep expertise in improving seal performance suggests it should be able to offer compelling value to new end markets.
Financial Strength
Smiths Group exited fiscal 2021 (ended July) with net debt/EBITDA at 1.6 times, in line with management’s target of below 2 times. This brings debt to a level that could be paid down through operating cash flow in about four years, if refinancing options are not available. The company expects to obtain net $1.85 billion in proceeds from the sale of its medical division to ICU. Management plans to use 55% of the proceeds for share buybacks. The remainder will be reinvested in the business, including acquisitions, and offer balance sheet support. Smiths is well balanced, given the reasonable leverage levels and business needs to fill in technology white spots to support top-line growth. The annual operating cash flow of around GBP 300 million per year through the 2026 explicit forecast period. This leaves enough room to cover annual capital expenditures of about 3% to sales and a dividend payout ratio of 50%-plus.
Bulls Say’s
- More than half of group revenue comes from recurring revenue sources, enabling Smiths to maintain operating profit margins well above 10%, even during troughs in the cycle.
- Spending on more significant repairs of John Crane’s mechanical seals by refiners at oil majors should rebound in the next couple of years due to more favourable oil prices and ageing of the seals.
- As an incumbent supplier, Smiths Detection is excellently positioned to gain orders from U.S. airport operators to install updated baggage screening equipment over the medium term.
Company Profile
With its start as a London jeweler in the 19th century, Smiths Group has for most of its history operated as a company operating disparate but economically attractive businesses. Thematically, it runs businesses that manufacture niche products in security- or safety-sensitive industries. Today, Smiths Group is split across four divisions: mechanical seals, weapons detection, electrical connectors, and specialized hoses. The end customers for these products include airports, NASA, government security or defense departments, and hospitals.
(Source: MorningStar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.