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.

The Final Dividend will be paid on 11 May 2022.

Rationale for Valuation – BUY at GBX 1,207.50

• Financial Growth: In FY21, SN. reported a significant growth in revenue, operating profit, and earnings per share against FY20.
• CEO Appointment: On 22 February 2022, SN. Has appointed Dr Deepak Nath as a new CEO (who will take up the role on 1 April 2022). He led several programme to drive growth and margin expansion in the Diagnostics business segment of Siemens Healthineers.
• Technical: From a technical standpoint, the current stock price is hovering close to the lower Bollinger Band, reflecting an oversold scenario.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Cash Flow, and Price/Book Value multiples are lower than the median of the Healthcare & Equipment Supplies industry.

Key Risks

• Ukraine Tension: The mounting concern over the Russian invasion in Ukraine can continue to weigh on the equity market.
• Subdued Macroeconomic Conditions: The dented risk appetite of investors amid record inflation rate in the UK, global supply chain constraints, expectations for further interest rates hikes, and shortage of hospital staffing.

Financial Highlights (for the year ended 31 December 2021, as of 22 February 2022)

 (Source: Company Website)

• Top-line Growth: During FY21, revenue surged to 14.3% to US$5,212 million (FY20: US$4,560 million).
• Bottom-line Growth: The trading profit jumped from US$972 million in FY20 to US$1,048 million in FY21, with a robust trading cash flow of US$828 million.
• Dividend: recommended a full-year dividend of 37.5 cents per share, in line with FY20.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

*Peers: ConvaTec Group PLC, Reckitt Benckiser Group PLC, Relx PLC, and Inspecs Group PLC.

*All selected peers are LSE-listed Companies from the Health Care sector.

*1.00 US Dollar = 0.73713574 British Pounds.  

Conclusion

By FY24, SN. targeting underlying revenue growth of 4% to 6%, a trading profit margin of at least 21%. SN. 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. The stock made a 52-week High and Low of GBX 1,601.50 and GBX 1,151.50, respectively. 

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 1,207.50 (as of 22 February 2022, at 8:55 AM GMT), with lower double-digit upside potential based on 20.97x Price/NTM Earnings (approx.) on FY22E 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 unfavourable movement in the stock prices.

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