Smith & Nephew PLC

Smith & Nephew PLC (LON: SN.) is a 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 across its three global franchises, namely Advanced Wound Management, Orthopaedics and Sports Medicine & ENT (Ear, Nose and Throat). The Group is focused on five strategic priorities – expanding the established markets, continuous innovation, accelerating growth in emerging markets, supporting organic growth with acquisitions, and improving the operating model. It has manufacturing facilities in several countries, including Canada, USA, UK, Switzerland, Germany, China, Costa Rica, and India.

Upcoming Events

• On 12 May 2021, FY20’s final dividend per share of 23.1 US cents was paid to the shareholders on the Register at the close of business on 6 April 2021.
• On 29 July 2021, SN (Smith & Nephew) expects to report H1 FY21 results.
• On 4 November 2021, the Company has scheduled its Q3 FY21 results.

Growth Prospects

• Leading Position in Attractive Markets: As shown in the image below, SN holds approximately 11%, 26%, and 14% of the market share in the Hip & Knee Implants, Sports Medicine, and Advanced Wound Management industry space, respectively. With such market share, it holds a leading position with a robust portfolio of medical technology.

(Source: Company Presentation)

• Accretive Growth and Product Developments: SN has continued to make acquisitions and develop new products throughout FY20. Moreover, the acquisition of Extremity Orthopaedics business of Integra Life Sciences Holdings Corporation will expand the portfolio in the higher-growth extremities segment. In FY20, the Group had launched multiple new innovative products and announced an acquisition that will strengthen the business position. In China, the Company has received approval from the National Medical Products Administration to introduce its REDAPT System for total hip arthroplasty. Furthermore, the Company has maintained the investment in R&D, with a new robotics platform and other new product introductions.
• Progressive Dividend Policy: SN has paid a dividend every year since 1937. During FY20, the Company paid a total dividend per share of 37.5 US cents, in line with FY19. The solid dividend trend is supported by the strong cash conversion, which has remained above 83% since FY17. The trading profit to cash conversion ratio was increased to 101% in FY20 from 83% in FY19.

Risk Assessment

• Emerging Risks: Loss of intellectual property and inadequate consideration to cybersecurity can adversely impact the operations. Similarly, failure to identify appropriate acquisitions, violation of compliance policy, failure to differentiate products from competitors, geopolitical uncertainties, and increasing pricing pressure could also impact the business performance.
• Principal Risks: The ongoing Covid-19 pandemic has created difficulties for manufacturing, distribution, and support functions globally. In such a scenario, the unavailability of critical system infrastructure and applications can significantly disrupt business activities. Moreover, the fluctuating currency exchange with macroeconomic instabilities can adversely impact the trading margins. The pandemic has also restricted its ability to conduct live product trials.
  

Now we will analyse some key fundamental and shareholders statistics of Smith & Nephew PLC.

Recent News

Board Appointment: On 10 February 2021, Dr John Ma (Chief Executive Officer and Chair of Ronovo Surgical) was appointed as a Non-Executive Director of the Smith & Nephew’s Board.

Acquisition: On 4 January 2021, SN completed the acquisition of the Extremity Orthopaedics business of Integra Life Sciences Holdings Corporation for USD 240 million. The acquisition shall bolster the capabilities of the rapidly growing extremities segment.

Trading Update (for the first quarter ended 3 April 2021, as on 29 April 2021)

 (Source; Company Presentation)

• During Q1 FY21, SN reported 11.5% year-on-year revenue growth on a reported basis and 6.2% year-on-year revenue growth on an underlying basis. All three franchisees – Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management shown recovery and supported the revenue growth.
• The surgery volumes also recaptured pre-Covid-19 momentum. The strong recovery was supplemented by the acquired assets, better commercial execution, and new product launches.
• With the reopening of healthcare systems and improved rollout of vaccine programmes, the Group has enhanced confidence in the outlook and better visibility for growth.

Financial Highlights (for the period ended 31 December 2020, as on 18 February 2021)

 (Source: Company Website)

• FY20 revenue declined 11.2% year-on-year on a reported basis and 12.1% on an underlying basis.
• Due to increased R&D investment, negative leverage from SG&A costs, and lower gross margins, the trading profit margin stood at 15% in FY20.
• The full-year dividend remained unchanged for FY20 (against FY19) at 37.5 cents per share, reflecting confidence in business and strength of the balance sheet.
• The Company also increased R&D investments and announced several new product launches.
• As of 31 December 2020, SN had access to cash and cash equivalents of US$1,751 million with net debt of US$1,722 million (excluding lease liabilities).

Financial Ratios (FY20)

Share Price Performance Analysis

 (Analysis done by Kalkine Group)

On 24 June 2021, at 7:00 AM GMT, Smith & Nephew PLC’s shares were trading at GBX 1,545.50, up by 0.32% against the previous day closing price. The stock made a 52-week High and Low of GBX 1,681.50 and GBX 1,317.00, respectively.

SN.’s stock price is showing a bullish momentum as the current market price is sustaining above the 50-day EMA (GBX 1,514.80) and 100-day SMA (GBX 1,475.60). Meanwhile, the momentum oscillator 14-day RSI (54.46) reflecting a neutral strength and suggesting an indecisive action. Moreover, the recent volumes are showing the decreasing trend along with decrease in prices further showing lesser participation and trading in the stock. Adjacently, the MACD line is also trading above the centerline, however, forming a negative crossover with the signal line.

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Business Outlook Scenario

As a priority for FY21, Smith & Nephew will focus on returning to top-line growth and recapture solid trading momentum, driving further operational improvements, and continue to respond effectively to the Covid-19 pandemic. In the medium term, the Group looks forward to improving trading profit margin with a proven strategy to outgrow the markets. Further, the progressive dividend policy underpins confidence in the outlook, while the Group intends to return to dividend growth when the performance allows. The recent funding through the US$1 billion US bond issue shall enable them to pursue its strategic objectives. The Group has furthered strengthened its business position through acquisitions and by launching new products in FY20. It has also maintained investment in R&D and introduced several new products, including a robotic platform. Overall, the Company has a proven strategy, unique portfolio, and a robust balance sheet to take advantage as the market recovers.

The reinstated FY21 guidance has been summarised in the image below:

(Source; Company Presentation)

Considering the robust cash generation capabilities, stable dividend policy, solid balance sheet, clear strategy for growth with support from the valuation as done using the above method, we have given a “BUY” recommendation on Smith & Nephew PLC at the current market price of GBX 1,545.50 (as on 24 June 2021, at 7:00 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 Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer 

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

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