Smith & Nephew PLC (LON: SN.) – Sustainable business model with a robust balance sheet position

Smith & Nephew PLC 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.

Investment Rationale – Buy at GBX 1,385.00

• SN has increased investments in R&D and expects to return to top-line growth in FY21.
• 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 strengthen the portfolio.
• Over the past three years (FY17 to FY20), gross margin and EBITDA margin have remained above 69.80% and 24.30%, respectively, reflecting strong profitability.
• From a technical indicator, 10-day SMA (1,373.20) is supporting an upside potential, which means the stock price could increase in the short term.

Risk Assessments

• SN’s business is exposed to several principal risk factors, such as cybersecurity, regulatory changes, failure to launch new products, talent management, pricing and reimbursement, commercial risk, unsuccessful integration of acquired businesses, political and economic factors.
• Also, the emerging risk of Covid-19 has been affecting business continuity and causing a substantial amount of financial risk.

Recent News

04 January 2021: The Company updated that it had completed the acquisition of the Extremity Orthopaedics business of Integra Life Sciences Holdings Corporation for USD 240 million.

Fourth Quarter and Full Year 2020 Results 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 as 2019 at 37.5 cents per share, reflecting confidence in business and strength of the balance sheet.
• The recent product launches performed well, and the Company also increased R&D investments.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In the H1 FY21, the Covid-19 pandemic will continue to impact the pace of recovery. In FY21, the Group expects to return to top-line growth and recapture momentum. 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. Stock 52-week High and Low were GBX 1,742.50 and GBX 1,055.01, respectively.

Considering the improved financial performance during H2 FY20, decent cash generation capabilities, multiple innovative products, solid balance sheet, and 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 1,385.00 (as on 12 March 2021, before the market close at 08:00 AM GMT) with lower double-digit upside potential based on 25.61x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Amryt Pharma Holdings Ltd – Revenue guidance for FY21 underpins confidence in the outlook.

Founded in 2015, Amryt Pharma Holdings Ltd (LON: AMYT) is a FTSE AIM All-Share listed commercial-stage biopharmaceutical company, which is dedicated to developing and commercializing novel therapeutics for patients with rare life-threatening diseases.

Investment Rationale – Hold at GBX 194.96

• Revenue guidance for FY21 has been set at US$200 to US$205 million.
• From a technical standpoint, 14-day RSI (25.50) reflecting an oversold stance, and hence, short-term rebound can be expected.
• Recently, it got listed on Nasdaq, signed a distribution agreement for Myalepta®, completed integration for Aegerion, and received positive top-line Phase 3 results for FILSUVEZ® EASE study.
• Overall, it has a revenue-generating commercial portfolio, financial flexibility to pursue anticipated development plans, and global commercial infrastructure to support the long-term growth plans.

Risk Assessment

• The growth trajectory is dependent upon the pipeline of product candidates which could fail to be the marketable products.
• There is a liquidity risk as the Company has been incurring losses since its inception.
• Also, the adverse US federal income tax regimes and fluctuating exchange rates can affect the financial condition further.

Recent News

8 March 2021: Amryt signed a distribution agreement with Medison Pharma Canada to distribute Myalepta® in Canada.

FY20 Results for the period ended 31 December 2020. (as on 4 March 2021)

(Source: Company Website)

• During FY20, revenue surged 18.5% year-on-year, while the Company registered a fourth consecutive year of positive cash flow generation.
• The Company also delivered positive results from EASE pivotal Phase 3 study in Epidermolysis Bullosa.
• It is encouraged by the developments around the pipeline of new therapeutic drug candidates.
• As of 31 December 2020, the cash balance stood at US$118.8 million (2019: US$67.2 million).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

AMYT delivered strong FY20 results with significant progress against the pipeline and new drug candidates. It has also issued revenue guidance of US $200-US$205 million in revenue for FY21, which demonstrates confidence in the Company’s prospects. Over the past four years, it has demonstrated a flexible and adaptable business model to become a global player in rare and orphan diseases. In a nutshell, AMYT has revenue-generating commercial portfolio, financial flexibility to pursue anticipated development plans, a pipeline of new therapies to serve high unmet needs and global commercial infrastructure to support long-term growth. Stock 52 week High and Low were GBX 250.00 and GBX 80.00, respectively.

Based on the solid operational performance, robust pipeline, and valuation methodology, we have given a “Hold” recommendation on Amryt Pharma Holdings Ltd at the current price of GBX 194.96 (as on 12 March 2021, before the market close at 9:20 AM GMT), while we look forward to reviewing how the Company would capitalise on its pipeline.

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

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

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