Smith & Nephew Plc

Smith & Nephew Plc (LON: SN.) is listed on the FTSE 100 index. It is a medical technology company with global operations.

On 4 November 2021, the Company would release its Q3 FY2021 trading report.

The next dividend of USD 0.144 per share would be paid on 27 October 2021 (interim dividend).

Investment Rationale for Valuation – Hold at GBX 1,414.50

• Recently, the Company launched new total shoulder and total ankle replacement technologies.
• The Company’s OXINIUM technology has achieved the status of the best performing bearing. It has the lowest risk of revision in total hip arthroplasty.
• On the profitability front, the Company’s EBITDA margin in H1 FY2021 outperformed the industry median of 23.4%.
• In the last five years, the stock has outperformed the benchmark FTSE 100 index.
• On the technical front, the 14-day RSI at about 46.36 is moving towards the oversold zone. Hence, there could be an uptick in the stock price in the near term.

Key Risks

• The introduction of disruptive technologies by a competitor could take away the market share of the Company.
• Failure or delay in adapting effectively to material changes in the regulatory environment surrounding the healthcare market could lead to significant cost incurrence.
• The restrictions on elective surgery could lead to commercial execution risk for the Company.
  

Financial Highlights (for six months ended 3 July 2021 (H1 FY2021), as of 29 July 2021)

(Source: LSE Website)

• Driven by significant contributions from recently launched products, revenue in H1 FY2021 surged 27.8% YoY.
• It led to an operating profit of USD 239 million in H1 FY2021, improving from an operating loss of USD 5 million in H1 FY2020.
• Due to higher revenue and leverage from fixed costs, trading profit in H1 FY2021 rose to USD 459 million from USD 172 million in H1 FY2020.
• Driven by strong cash generation, the management offered an interim dividend of USD 0.144 per share, similar to that in H1 FY2020.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

The management expects to deliver double-digit underlying revenue growth during FY2021, driven by its research and development pipeline and value from its acquisitions. Furthermore, the Company has a target of 18% to 19% trading profit margin. Also, the surgery volumes are expected to be unaffected by the Covid-19 in H2 FY2021. Meanwhile, the stock made a 52-week low and high of GBX 1,317.00 and GBX 1,681.50, respectively.

Based on the launch of new technologies, better profitability of the Company than the industry, decent research and development pipeline of the Company, and support from valuation as done using the above method, we have given a “HOLD” recommendation on Smith & Nephew Plc at the current market price of GBX 1,414.50 (as on 2 September 2021 at 9:20 AM GMT), while we look forward to taking a fresh position depending on further corporate announcements by the Company. 

Chill Brands Group Plc

Chill Brands Group Plc (LON: CHLL) is listed on the FTSE and is a UK based international cannabidiol (CBD) and natural resources company that manufactures and distributes its offerings across the UK, the US and Europe.

In September 2021, CHLL would release its audited FY2021 report.

Investment Rationale – Speculative Buy at GBX 28.60

• CHLL’s CBD product line drew significant consumer interest after its launch.
• CHLL’s new anti-ageing skincare product line has been shortlisted by prestigious industry awards bodies.
• In FY2021, CHLL’s revenue surged by ~246.5% YoY.
• On the liquidity front, CHLL has a higher current ratio than the industry median of 1.36x in H1 FY2021.
• On the leverage front, CHLL has a lower debt/equity ratio than the industry median of 0.40x in H1 FY2021.
• On the technical front, the 14-day RSI at about 27.23 is sustaining at the oversold zone, indicating a potential uptick in the stock price in the near term.

Key Risks

• CHLL is still a loss-making company. Hence, there could be significant pressure on its liquidity.
• The lack of external funding could affect CHLL’s operations significantly, as the Company is dependent on it.
• CHLL operates in a highly regulated industry, which could increase its costs.

Financial Highlights (for the year ended 31 March 2021 (FY2021), as of 31 August 2021)

(Source: LSE Website)

• Driven by CHLL’s CBD product line and new product entry in the international market, revenue in FY2021 surged dramatically by ~246.5% YoY.
• It led to a ~16% YoY reduction in net loss for the Company in FY2021.
• Due to CHLL’s loss-making operations, cash position declined by ~4.5% YoY in FY2021.
• Due to the reduction in liquidity and loss-making operations, the management has not offered any dividends.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

Conclusion

The Company operates in a high-growth sector and uniquely positions itself to get the first-mover advantage through major contracts. There could be further growth in the Company’s global customer base driven by a dynamic UK website and repeat sales in the US. Overall, on the back of the Company’s recent rebranding, the Company expects to accelerate the growth trajectory in FY2022 and beyond. Meanwhile, the stock made a 52-week low and high of GBX 15.10 and GBX 109.70, respectively.

Based on the introduction of new products in new markets, the transformative rebranding, and the better liquidity and leverage of the Company than the industry, we have given a “Speculative Buy” recommendation on Chill Brands Group Plc at the current market price of GBX 28.60 (as on 2 September 2021 at 10:50 AM GMT). 

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

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

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

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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