Smith & Nephew PLC (LON: SN.)

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.

On 22 February 2022, the Company will release FY21 results.

Recent trend of dividend payments

The Company had paid an interim dividend of 14.40 US cents per share attributable for H1 FY21 on 27 October 2021, while the ex-dividend date was 30 September 2021. It remained similar to the interim dividend paid during H1 FY20.

(Data Source: LSE Website, Research done by Kalkine Group)

Growth Prospects

• Acquisition Benefits: has a core acquisition strategy to invest in businesses and technologies in higher-growth segments. With the recent acquisition of Engage Surgical's Partial Knee System, the Company would be able to cement its position in the key US market. Moreover, the partial knee market is currently worth approximately USD 300 million in the US.
• Divisional Growth: The Company’s business segments, Advanced Wound Management and Sports Medicine & ENT, witnessed decent revenue growth of around 12.1% and 8.3%, respectively, during Q3 FY21.

Key Risks 

• Reduced Guidance: The Company expected to achieve the low end of the full-year guidance because of the adverse impact of Delta variant and supply constraints.
• Inflation Concern: Due to the inflationary pressure, the Bank of England increased the Bank Rate by 25 basis points to 0.50%. It can keep the equity market under pressure amid the rising US Dollar index.
• Sluggish UK Macroeconomic Indicators: The UK Composite PMI fell marginally to 53.4 in January 2022 from 53.6 in December 2021, while the UK consumer price inflation breached a nearly 30-year high of 5.4% in the 12 months to December 2021.

Key fundamental and shareholders statistics of Smith & Nephew PLC. 

BlackRock Institutional Trust Company, N.A. Ltd. is the most significant shareholder as it holds nearly 46.43 million shares as of 31 December 2021.         

Strategy Update (as of 16 December 2021)

• Divisional Performance: The Company had demonstrated profitable growth in Advanced Wound Management and Sports Medicine franchises, which represents 60% of the portfolio.
• Share Buyback: The Company aimed to distribute surplus capital to shareholders through annual share buy-back ranging from USD 250 million to USD 300 million for 2022.

H1 FY21 Financial Highlights (six months period ended 03 July 2021, as of 29 July 2021)

(Source: Company Filings)

• Top-Line Revenue: On a reported basis, the top-line revenue grew by around 27.8%, and, on an underlying basis, it rose by about 21.3%, during H1 FY21.
• Divisional Improvements: Moreover, Sports Medicine & ENT and Advanced Wound Management achieved underlying revenue growth during Q2 FY21 when compared with an equivalent period of 2019.
• Robust Jump in Profitability: On the profitability front, the earnings per share had increased from 11.50 US cents per share during H1 FY20 to 23.4 US cents per share for H1 FY21.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 10 February 2022 at 09:05 AM GMT, SN.’s shares were trading at GBX 1,233.00, down by around 0.16% against the previous day closing price. Stock 52-week High and Low were GBX 1,619.00 and GBX 1,184.00, respectively.

On a daily chart, the stock price is hovering between the lower Bollinger band and the middle Bollinger band. Hence, there could be an uptick in the stock price in the near term. Meanwhile, the 14-days RSI stood at ~45.98 levels. 

Valuation Methodology: Price/Earnings Approach (FY21E) (Illustrative)

Business Outlook

SN. delivered a robust performance in H1 FY21, followed by a decent Q3 FY21 performance. Moreover, the Company aimed to meet the lower end of FY21 revenue growth guidance ranging from 10% to 13%. Furthermore, SN also anticipates FY21 trading profit margin falling between 18% and 19%. SN. targets organic revenue growth ranging from 4% to 6% by 2024. Meanwhile, the Company aimed on rebuilding a trading margin of at least 21% by 2024. In a nutshell, SN. remained on track to achieve robust revenue growth supported by the R&D pipeline and realizing untapped synergies from the recent acquisitions.

Considering the solid operational progress, robust profitability margins, acquisition benefits, decent guidance, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Smith & Nephew PLC at the current price of GBX 1,233.00 (as on 10 February 2022 at 09:05 AM GMT), with lower-double digit upside potential based on 25.78 Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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