Smith & Nephew Plc

Smith & Nephew Plc (LON: SN.) is a UK based company that is into the business of medical technology, which helps in restoration of wellbeing.

Investment Highlights - Smith & Nephew Plc – Buy at GBX 1,469.00

• The Company has shown an improvement in trading performance in the third quarter of the financial year 2020, with growth in Chinese and the US markets.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book Value multiples of the Smith & Nephew Plc are currently lower as compared to the corresponding multiples of the Healthcare Equipment & Supplies industry. It reflects, shares are undervalued as compared to the industry.
• The Company has strong liquidity in the first half of the financial year 2020 with a current ratio of 2.18x, which is slightly higher than the industry median of 2.15x. The Company managed to maintain decent liquidity for the last 4 years.
• From the technical standpoint, 14-day RSI is supporting an upside move (around 49 level), which means the stock price could increase in the short term.

Key Risks

• The Company may fail to obtain approval for new or changed technology can put the product at risk.
• The Company operates in a highly regulated landscape, and failure to comply could lead to a significant financial or reputational loss.

Trading Statement for Q3 FY2020 (26 September 2020) (released on 29 October 2020)

• The Company saw a significant recovery from the Q2 FY2020 and reported revenue of $1,200 million in Q3 FY2020.
• On an underlying basis, the US business has returned to a growth of 0.9% year-on-year, but Other Established Markets business was down by 6.2% year-on-year.
• The Emerging Markets was down by 14.5% year-on-year, with growth in China offset by pandemic impacts in India and LATAM.
• Moreover, the Company witnessed an improvement in all three franchises from the second quarter of 2020.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has made decent progress in the third quarter of the financial year 2020. The Company is prepared as it witnessed a recovery in elective surgery at global levels and delivered substantially improved performance. SN experienced growth in both of its largest markets, China and the US. The Company continue to launch new products as a part of strategic imperatives. The Company is looking forward to expanding portfolio in extremities segment, with the acquisition of Extremity Orthopaedics business of Integra LifeSciences Holdings Corporation, to achieve higher growth. At present, the Company is not able to provide any guidance based on the risks related to covid-19 pandemic. The stock made a 52-week low and high of GBX 1,055.01 and GBX 2,023.00, respectively.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Buy” recommendation for Smith & Nephew Plc at the current price of GBX 1,469.00 (as on 13 November 2020, before the market close at 1:15 PM GMT), with lower double-digit upside potential based on 32.31x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

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

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

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