Smith & Nephew PLC

Smith & Nephew PLC (LON: SN.) is an FTSE 100-listed healthcare company that is focused on the repair, regeneration, and replacement of soft and hard tissue.

On 28 July 2022, SN scheduled the release of its H1 FY22 results.

Investment Rationale for Valuation – Hold at GBX 1,312.00

• Growth Catalysts: SN delivered an encouraging start to FY22 and looked confident of achieving its medium-term financial commitments on the back of revenue growth across divisions, new product developments, strong productivity, and commercial execution.
• Decent Outlook: The Group is planning for underlying revenue growth of 4% to 5% in FY22. For trading profit margin, SN is targeting around 50 basis points of expansion in FY22.
• Financial Growth: The Company had reported decent performance during FY21, with a rise in revenue and operating profits. Meanwhile, the cash generated from operations stood at £1,048 million in FY21, compared to a cash inflow of £972 million in FY20.
• Undervalued Multiples: On a forward 12-month basis – key valuation multiples (EV/Sales, EV/EBITDA, Price/Cash Flow, and Price/Book) are undervalued against the average of the Healthcare Equipment & Supplies sector.

Key Risks

• Inflation Woes: The margin of acquired assets are likely to be impacted by the anticipated headwinds from input cost inflation and China VBP (volume-based-procurement) implementation.
• Covid-19 Pandemic: The fresh restrictions in Beijing for curbing the spread of Covid-19 can impact the Company’s business in China.

Trading Statement (for the first quarter ended 2 April 2022, as of 28 April 2022)

(Source: Company Website)

• Top-line Growth: During Q1 FY22, revenue grew by 3.3% YoY, on the back of improved performance from Orthopaedics, and sustained growth of Sports Medicine & ENT and Advanced Wound Management verticals.
• Operational Growth: The Company continued progress with the new product development programme and focused on strategic growth. Therefore, the full-year outlook remained unchanged.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)

*Peers: Deltex Medical Group PLC, EKF Diagnostics Holdings PLC, and GlaxoSmithKline PLC.

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

* 1USD=~.80 GBP.

Conclusion

Based on the increase in top-line, impressive rise in operating profit, strategic initiatives, and support from the valuation as done using the above method, we have given a “Hold” recommendation on Smith & Nephew PLC at the closing market price of GBX 1,312.00 (as of 28 April 2022).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

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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