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.

The company is expected to provide an update on its Q1 FY22 results on 28 April 2022.

Investment Rationale for Valuation –Hold at GBX 1,223.00

• Decent Results: The company has reported decent performance during FY21, with a rise in revenue and operating profits.
• Increase in Cash Flow: Cash generated from operations stood at £1,048 million in FY21, compared to a cash inflow of £972 million in FY20.
• Strategic Initiatives: The Group has focused on growth during FY21 supported by commercial execution, innovation, and acquisitions. Also, an increase in investment in R&D led to new product launches during the year.
• Outlook: The Group is planning for underlying revenue growth of 4% to 5% in FY22, and expects growth to be stronger in H2 FY22, compared to H1 FY22.

Key Risks

• Macro Risk: The recent trading conditions have been very volatile owing to the outbreak of war in Ukraine and rising energy prices, which is expected to put pressure on the equity markets in the near term.
• Interest Risk: The company is prone to the risk of a hike in the interest rate due to the presence of significant borrowings on its balance sheet.

Recent News

Leadership Appointment: The company has decided to appoint Dr Deepak Nath as its new Chief Executive Officer, effective from 1 April 2022. 

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

(Source: Company Website)

• Increase in Revenue: The Group clocked revenue growth of 14.3% in FY21 to US$5,212 million, compared to FY20. It also updated that Sports Medicine & ENT and Advanced Wound Management revenue were above the pre-COVID levels.
• Jump in Operating Profit: The company reported a jump in operating profit by 101% to US$593 million in FY21, compared to FY20.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22E)

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 current market price of GBX 1,223.00 (as of 08 April 2022, at 11:05 AM GMT+1) with higher single-digit upside potential based on 20.94x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

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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