Smith & Nephew Plc

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

The Company will release the Q1 FY2021 update on 11 May 2021.

Investment Highlights - Smith & Nephew Plc – Buy at GBX 1,392.76

• The Company, through additional investment in research and development, differentiating product portfolio and product pipeline and recent acquisitions is looking to recapture momentum and revenue growth in FY2021.
• The Company has a strong liquidity position with a current ratio of 2.76x in FY2020, which is higher than the industry median of 1.77x. The Company has a strong liquidity position for the last 5 years.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book Value multiples of 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.
• From the technical standpoint, 14-day RSI is in the oversold zone and is supporting an upside move (around 24 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.

Financial Highlights – Q4 & FY2020 (31 December 2020) (released on 18 February 2021)

(Source: Quarterly Report, Company Website) 

• For the financial year 2020, the performance was impacted by the covid-19 pandemic; the revenue declined by 11.2% on a reported basis and 12.1% on an underlying basis. The revenue in the fourth quarter declined by 5.8% and 7.1% on a reported and underlying basis, respectively.
• The profitability margins for the financial year 2020 declined due to lower revenue and higher expenses related to research and development.
• The Company reported lower trading cash flow and cash generated from operations as on 31 December 2020.
• The cash balance as on 31 December 2020 increased to $1,762 million (31 December 2019: $277 million).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has shown a decline in financial performance in the fourth quarter and financial year 2020. Both the top-line and the bottom-line were impacted by the covid-19 pandemic. Despite the market uncertainty, the Company has increased its liquidity position and reported a strong balance sheet. SN has declared a dividend of 37.5¢ per share for the financial year 2020, reflecting business confidence. The Company is looking for acquisitions to support sustainable growth and securing new innovation. In the financial year 2021, the Company is seeking to recapture momentum and is focused on revenue growth. Smith & Nephew more focused on supply chain and manufacturing to further improve operational performance. The Company expects trading to remain challenging in H1 FY2021, and the pace and timing of recovery still unknown. The stock made a 52-week low and high of GBX 1,055.01 and GBX 1,854.50, respectively.

Based on the factors discussed above, we have given a “BUY” recommendation on Smith & Nephew Plc at the current price of GBX 1,392.76 (as on 26 February 2021, before the market close at 8:05 AM GMT) with a lower double-digit upside potential based on 24.22x Price/NTM Earnings (approx.) on FY21E 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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