Smith & Nephew PLC (LON: SN.) – Targeting underlying revenue growth ranging from 10.0% to 13.0% during FY21.

Smith & Nephew PLC is an FTSE 100 listed medical technology company with global operations. The Group was established in 1856 in Hull, United Kingdom. Currently, it operates in over 100 countries with more than 17,500 employees. Moreover, the Company has three reportable business segments – Orthopaedics, Sports Medicine & ENT (“Ear, Nose and Throat”), Advanced Wound Management. It became a constituent of LSE (London Stock Exchange) on 13 August 1951.

(Source: Company presentation)

Recent trend of dividend payments

The Company will pay a final dividend of 23.1 US cents per share for FY20 on 12 May 2021, while the ex-dividend date was 01 April 2021. It had taken full-year FY20 dividend to 37.5 US cents per share, similar to the FY19 levels.

Growth Prospects and Risk Assessment

The Company had delivered an outstanding performance in the Sports Medicine division during Q1 FY21, benefitted by the return of elective surgeries in an outpatient setting. Moreover, the advanced wound management segment was benefitted from improved commercial execution. For the Orthopaedics division, the Hip Implants business would be expected to outperform Knee Implants during FY21. The recently completed acquisition of the Extremity Orthopaedics business of Integra Life Sciences Holdings Corporation for USD 240 million would expand the portfolio in the higher-growth extremities segment. Furthermore, the recent product launches had performed well, and the Company would seek to make increased R&D investments to drive further growth. SN. has a core acquisition strategy to invest in businesses and technologies in higher-growth segments.

(Source: Company presentation)

Overall, the Company has a proven strategy, unique portfolio, and a robust balance sheet to take advantage as the market recovers.

SN. is undergoing several significant risks, such as restrictions on elective surgery had raised the likelihood of the commercial execution risk. The Company is also exposed to pricing and reimbursement risk due to increased financial pressure on governments and hospitals caused by the Covid-19 pandemic. The introduction of new Medicines and Healthcare products might face regulatory risk. Furthermore, there are other principal risks like unsuccessful integration of acquired businesses, political and economic factors.

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of Smith & Nephew PLC.

Q1 FY21 Trading Update (for the period ended 03 April 2021, as of 29 April 2021)  

(Source: Company result) 

• On a reported basis, the total revenue grew by around 11.5%, and on an underlying basis, the total revenue rose by 6.2% during Q1 FY21 as compared to Q1 FY20.
• The established markets had shown underlying revenue growth of approximately 3.4% while emerging markets had demonstrated underlying revenue growth of around 21.8% during the period.
• The Advanced Wound Bioactives had witnessed exceptional underlying revenue growth of approximately 26.7% during the period.
• Meanwhile, the Sports, Medicine & ENT division had demonstrated robust underlying revenue growth of approximately 10.4% during the period.

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 29 April 2021, at 09:38 AM GMT, SN.’s shares were trading at GBX 1,551.50, up by 4.48% from the previous day closing price. Stock 52-week High and Low were GBX 1,742.50 and GBX 1,317.00, respectively.

SN's prices are witnessing a sharp upside movement after taking the support of a downward sloping trend line. Now the prices are approaching another downward sloping trend line resistance level, and a breakout of the same may extend buying in the stock. On a weekly chart, the momentum indicator RSI (14-period) is trading at ~57.12 levels coupled with the trend-following indicators 21-period SMA and 50-period SMA, sustaining below current market price and further supporting a positive stance for the stock.

In the last five years, SN.’s stock price has delivered a positive return of ~35.57%; and it has outperformed the FTSE All-Share Pharmaceuticals & Biotechnology index with a return of around 30.39% and the FTSE 100 index with a return of about 12.25%.

Business Outlook Scenario

The Company had made an encouraging start to FY21 with solid revenue growth in Q1 FY21. Moreover, all three business segments had shown an increase in underlying revenue during Q1 FY21. The Company would aim to regain pre-Covid-19 momentum during 2021, driven by better commercial execution, acquired assets, and recent product launches. With regards to the FY21 financial guidance, the Company had targeted underlying revenue growth ranging from 10.0% to 13.0%, and the trading profit margin ranging from 18.0% to 19.0%, considering no significant impact of Covid-19 on surgery volumes during H2 FY21. On a reported basis, the projected revenue growth target would be ranging from 14.8% to 17.8% during FY21.

However, the Company had raised concerns regarding several temporary headwinds as reduced production volumes because of the Covid-19 pandemic would adversely impact the gross margin. Also, the Gross margin would be anticipated to decline by 100 basis points due to rising R&D investments, 150 basis points due to the impact of acquisitions, and 100 basis points because of foreign exchange fluctuations during FY21. Overall, the Company is well-positioned to deliver long-term growth considering improved visibility driven by accelerated Covid-19 vaccination programmes.

Considering the robust revenue growth in Q1 FY21, quickened recovery in Sports Medicine division, recent acquisition benefits, sound liquidity profile, strong financial performance, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Smith & Nephew at the current price of GBX 1,551.50 (as on 29 April 2021 at 09:38 AM GMT), with lower-double digit upside potential based on 29.94x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*The dividend yield is subject to change as per the stock price movement.

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.