Spectris finals

Spectris develops and markets productivity-enhancing instrumentation and controls.  Operating in four segments - Materials Analysis, Test & Measurement, In-line Instrumentation and Industrial Controls.  I no longer have a holding in my growth portfolio (epic code: SXS).

Spectris announced their finals on Thursday and reported sales growth of 1.7% to £1,197.8m with an equal contribution coming from acquisitions and foreign currency exchange movements. On a like-for-like constant currency organic basis, sales for 2013 were broadly flat.

Sales by territorial destination grew in Europe and rest of the world by +5.8% and +6.0% respectively, but declined in North America and Asia by -0.9% and -0.6% respectively.  By division sales increased in Materials Analysis, Test & Measurement and Industrial Controls by +4.1%, +1.0% and +1.7% respectively with In-line Instrumentation declining by -0.3%.

Adjusted operating profit declined by 1% to £214.7m and like-for-like operating profit decreased by 3% with operating margins declining by 50 bps to 17.9%, principally as a consequence of an adverse product mix.

Adjusted EPS increased by 2% to 132.9p and statutory diluted EPS increased by 42.4% to 168.5p, statutory earnings reflected the profit on the sale of Fusion UV partially offset by general amortisation costs. 

The final dividend is increased by 9.8% to 28.0p, which amounts to a full year dividend of 42.75p up a healthy 9.6% on last year and well covered 3.9x by the statutory EPS and 3.1x by adjusted EPS.

Free cash flow at £112.6m was almost 25% below last year as operating cash flow declined by 18.7% and capital expenditure was increased by 13.9%.  Net debt though was reduced by £138.2m to £104.1m helped by the use of the proceeds from the sale of Fusion UV.  The company does state that net debt has declined by £150m, as management use a starting net debt figure from last year of £254.1m (this is not a number I recognise from their statements).  Their financing position is strong as operating cash flow represents 137% of net debt and their debt/EBITDA ratio is just 0.4 with gearing at 12%.  There is substantial capacity here for acquisitions or/and improving the dividend pay-out from 32% of underlying earnings and 45% of free cash flow.
   

The management's outlook states that "...Overall, our broad geographic and end market exposures, strong financial position, and on-going investment in the business provide the Board of Spectris with confidence that the company is well positioned for 2014 and beyond..." Any sustained improvement in trading will not all flow through to the bottom line as they have stated that: "...as previously highlighted, a return to sustainable growth will lead to a gradual reversal of the discretionary cost savings made in 2013..."

Analysts' consensus estimates for 2014 and 2015 are for EPS of 139.6p and 149.6p respectively, so growth of 5% and 7%.  With the share price at 2457p, SXS is on an historic P/E of 18.5 and a 2014 prospective of 17.6 which puts the shares on an unattractive PEG of 3.5.  Even the prospective yield offers a below market return at just 1.8% (consensus div for 2014 of 45.2p). 


My view is that SXS is now fully, if not slightly overvalued and therefore I took the decision to sell my holding today, having made a profit including dividends of 61.6% since my purchase back in June 2012 at 1548p (incl. costs) - when I believed they were undervalued.