Event in Progress:
View the latest research on other companies in the sector.
We are slightly perplexed by the market’s reaction to Smith & Nephew’s full year results. Trading was in line and there was a solid guide for FY24E. And while the initial share price reaction was positive, the shares fell sharply over the next few days. We think the market has an unconscious bias towards Smith & Nephew, always assuming the worst despite evidence to the contrary. Understandable given Smith & Nephew’s track record, but it is this unconscious bias that is creating an interesting disconnect between the valuation and the fundamentals. We set out in this note why we think both the revenue and margin guides are achievable and reiterate our view that the discount to peers is too high. We remain Buyers with an unchanged 1285p TP.
Smith & Nephew plc
Prints from Smith & Nephew’s peers suggest that trading conditions were relatively benign in Q4FY23E and in most cases are expected to remain so in FY24E. Given Smith & Nephew posted a strong set of Q3s in November we therefore wouldn’t expect any surprises in the upcoming results although, this being Smith & Nephew, there is always a risk of an unexpected banana skin. Let’s hope that isn’t the case as, if all is well, the combination of a positive market backdrop and a large dollop of self-help should bode well for Smith & Nephew in FY24E. The shares have bounced off their low but we think there is more to go in terms of rerating with the current valuation remaining undemanding both in absolute terms and relative to peers.
S&N reported estimate-beating Q3 23 trading figures as revenue was up by 7.7% on an underlying/organic basis. While the growth was impressively broad-based, the multiple disruptions across franchises/products continued to weigh. With most of these drags addressed by the end of the Q3 23, we see a high probability of upside to the FY23 guidance.
Smith & Nephew delivered a strong Q3 and while guidance wasn’t completely unchanged, it certainly wasn’t the profit warning the market was expecting. We leave our forecasts broadly unchanged and show in this note why we think the forecast risk for the balance of the year is relatively low. Even after today’s jump we think the shares are looking oversold and see plenty of upside remaining as the focus shifts to 2024. The shares are trading at a circa 30% discount to peers and while the track record and concerns over VBP warrants discount, 30% feels too high to us. We value the shares at 11x NTM EV / EBITDA, giving a revised price target of 1285p.
Smith & Nephew reported a mixed set of Q2/H1 2023 results, beating revenue estimates but missing bottom-line expectations. Revenue grew by 7.8%/7.3% in Q2/H1, driven by sports medicine and joint repair, with strong momentum in emerging markets (+11%). However, the trading profit was down 5.2%, and the margin outlook for FY23 (at least 17.5%) appears challenging. The company upgraded its top-line growth expectation to 6-7%. We will raise our top-line estimates but trim our margin estimates due to the weak H1 showing.
As expected, a lot of the focus post the interims has been on the H2 trading profit bias. We set out in this note why, although we wouldn’t describe the H1 to H2 margin bridge as a “walk in the park”, we think it isn’t as much of a hill to climb as it might first appear. We also think that the market has overlooked the significance of the structural change announced by Smith & Nephew, moving away from its franchise model, which we viewed as complicated, expensive and lacking in accountability to a more traditional global business unit model, with divisional presidents fully accountable for each division. We think this is key to driving through change and delivering the anticipated efficiencies. We’ve left our target price unchanged and remain Buyers although we note that the shares may well mark time until concerns over the H2 bias ease.
Smith & Nephew had a strong Q1 and while we do expect revenue growth to moderate in Q2, driven by tougher comps and elective volumes normalising, the expectation is that H1FY23E underlying growth will come in above full year revenue guidance. We do think there is an outside change that revenue guidance will be increased but we are more bearish on trading margin guidance. We expect H1FY23E to be a trough for margins, impacted by VPB, inflation, FX and a return to a more “normal” H1:H2 phasing and given FY23E H1:H2 bias (44%:56%) we think it unlikely margin guidance will change. We continue to view the shares as attractive but there is a risk that they may go weaker as the market digests the H1FY23E margin. Absent any nasty surprises in tomorrow’s statement, we would view this as a buying opportunity.
Smith & Nephew beat Q1 sales expectations, with underlying growth of 6.9%, driven by ‘Sports Medicine & ENT’ and Advanced Wound Management. Established markets revenue grew by 10%, but emerging markets declined by 7.3%, hurt by headwinds in China. The company reaffirmed its FY23 outlook and provided an update on its transformation plan, with expected one-time costs of $275m and annual savings of $200m by 2025. We expect a minor upgrade to our estimates.
Commodity redEYE, Smith & Nephew, Medica Group, Hotel Chocolat, Mining LOWdown, Market Highlights
SN/ MGP TW/ RS1 HWDN HCHOF
Our buy stance on Smith & Nephew is based on the premise that, whatever view one might take on its longer-term growth prospects, the company now has a credible turnaround plan with clearly defined actions and sensible targets and that as this plan is executed the shares will rerate. The recent Q1 results were a clear step in the right direction, beating expectations and demonstrating that the orthopaedic supply issues are at least partially resolved. One quarter does not a year make but, while we leave our forecasts largely unchanged, forecast risk is clearly reducing. We continue to value Smith & Nephew at a 15% discount to its peers, driving a higher price target of 1476p suggesting that the recovery story has more to run.
SAS - Multi asset Chartbook, Fintech, Commodity snapSHOT, Smith & Nephew, Unite Group, Derwent London, Ricardo, Shanta Gold, Accrol Group, Market Highlights
SN/ UTG DLN RCDO SHG ACRL PSN BAB
While some may say they can hear the sound of a stable door closing in the distance, we don’t think the horse has got that far yet and we are turning Buyers on SN. We were Holders on the basis that we feared that it would take longer than expected for SN to turn around the orthopaedics division and that the targets in the market didn’t reflect that risk. SN has largely addressed our concerns and not only set what we think are much more realistic targets, but also given a lot more granularity about how it is planning to get there. Yes, there is still execution risk, but with the shares still trading on low EBITDA multiples this is more than priced in. We increase our target price to 1410p but, given the recent run, we’d look to Buy on dips.
Smith & Nephew released largely in line Q4/FY 22 numbers but slashed its mid-term margin outlook to reflect the macro-economic uncertainty. Q4/FY growth was attributable to a broad-based recovery in Orthopaedics supporting the ex-orthopaedics momentum. The performance was overshadowed by the encouraging growth outlook – for FY23 as well as for the mid-term – which was cheered by investors, who ignored the softer than expected margin outlook, sending the stock 4.2% higher in trade.
Research Reels: Professional Services, Commodity snapSHOT, Smith & Nephew, MJ Gleeson*, Malin Corporation*, Market Highlights
SN/ GLE MLC MLC SSPG MONY BOWL
SN reports full year results next Tuesday. We don’t expect any shocks in the numbers but what will be important are how the recovery in SN’s orthopaedics division is progressing, guidance for FY23 and setting longer term targets. Peers have performed well in Q4 and most of the guidance for 2023 was “cautiously optimistic”. We think the 4.7% underlying revenue growth baked into SN’s FY23E consensus looks sensible. What is less clear is how margins will progress with the peer outlook more mixed on this front. Given the uncertainty we remain Holders with an unchanged 1120p TP.
Smith & Nephew announced a Q3 trading update in line with the consensus but slightly soft versus our own estimates, with revenue growth of 4.8% on an underlying basis as all segments registered an acceleration in their growth rates vs Q2/H1 22. While supply chain bottlenecks and staff shortages remained constraints, the former seem to be receding. The FY 22 outlook (4-5% UL growth and a 17.5% trading profit margin) was unchanged. We will trim our FY 22 estimates by low single digits to factor in the soft showing (vs AV estimates).
A sequential acceleration with Q3 sales up 4.8% organically (vs +1.2% in Q2) Like US peers, SandN has benefited from reducing Covid restrictions and a broader market recovery. But some input materials and staff shortages in hospitals/ASCs remain constraining factors across a number of segments. While Orthopaedics (+2% / +5.6% excl China) is still impacted by China (VBP in Recon; provincial tenders in Trauma), the early benefit of the new cementless option drove Knees (7% growth) - this was partly offset by Hips and Trauma (both -1%). Sports Med (+7%) was helped by the strong growth in shoulders and the brisk market recovery in ENT. Wound (+6%) was lifted by continued strength in APAC and almost 13% growth in Bioactives (easy comps). FY22 guidance reiterated The guidance for organic sales growth was finetuned to the mid-point of 4-5% (cons. 4.4%) and trading profit margin reiterated at around 17.5% (revised from 18.5% in July / cons. 17.4%). Mid-term margin guidance/expectations need to come down Last December, SandN issued mid-term guidance, targeting consistent 4-6% organic revenue growth by 2024 and trading margin of at least 21% by 2024. While the new CEO feels good about the growth component, he proved more cautious on margin from 2023, due to several headwinds (cost inflation; lack of pricing power; FX headwind revised up from 40-50bp to 75bp; investments into ''fixing Orthopaedics'' in line with the 12-point plan). Overall, while margin improvement remains on the cards in the mid-term, this will be delivered in ''a non-linear manner'' - this leaves room for consensus cuts. Sentiment approaching a trough, but TP cut further In spite of investors eagerly awaiting early signs of structurally-higher growth and reassurance on the mid-term margin trajectory, the shares have done well YTD (+25% vs sector), benefiting from the sector rotation and elective surgeries recovering. All eyes are now on new CEO Deepak Nath, who has a solid reputation with...
Smith & Nephew reported mostly in-line Q2 22 numbers, missing the top-line estimates (-0.6%) but beating on the trading profit (+0.5%), albeit marginally. The Q2 performance was overshadowed by a 100bp margin downgrade for FY22 (-50bps Y-o-Y vs +50bps previously), which sent the stock ~9% lower in the session following the update. The reiteration of the top-line growth outlook of 4-5% was no help either. We will cut our estimates, largely to reflect the soft margin guidance.
A sequential slowdown with 1% organic growth in Q2 ... This is slightly below consensus expectations (cons. at +2.0-2.5%), but these had come down ahead of H1 results, due to the pre-close calls and peer JandJ''s mixed results last week. The sequential slowdown vs Q1 (6% organic growth) stems from one fewer trading day, the implementation of VBP in China since April (2% of Group sales with prices halved), lockdowns in China (7% of Group sales) and supply chain issues. The latter mainly impacted Orthopaedics (-1.1%), while Sports Med (+1.9%) suffered from China lockdowns. AWM grew nicely (+3.8%), helped by Wound Devices (+7.9%). .... and profitability likely geared toward H2 H1 margin fell to 16.9% (-80bp y/y), due to cost inflation (freight/logistics), the impact of VBP in China and normalized marketing spending. The margin seasonality (H1 margin usually 150-400bp lower vs H2) will help to deliver on the (reduced) 2022 guidance for 17.5% margin (implied H2 margin 18%). FY22 guidance cut for margin, but maintained for organic growth of 4-5% Due to inflationary pressures proving ''worse than the worst-case scenario'', SandN cut their FY22 margin guidance to 17.5% (prev. 50bp gain vs 18.0% in FY21). Initiated in December 2021, the mid-term guidance seems at risk Even if the jump-off point is ''clearly more challenging'', CEO still aims for 4-6% organic sales growth by 2024 and trading margin of at least 21% by 2024 (with further improvements thereafter). While FX may prove a 40-50bp headwind in FY23, fixing execution in Orthopaedics will prove key. Share price momentum has stalled of late - our TP is cut to 1,200p (from 1,400p) Benefiting from the sector rotation and elective surgeries recovering, the shares had done well YTD. But investors have turned more cautious of late, eagerly waiting for early signs of structurally-higher growth in line with SandN''s mid-term targets and reassurance on margin trends. All eyes are now on new CEO Deepak Nath, who has...
Q1 sales up nearly 6% organically y/y, nicely above expectations (c.3%e) All three franchises contributed, with a special mention for Sports Med and ENT (+8.6%) and Advanced Wound Management (+8.0%). Volumes returned across elective procedure categories as the effects of the Omicron wave fell away in the US and Europe early in the quarter and the company benefitted from recent new product launches (eg cementless knee). SandN also mentioned it continues to focus on managing the global shortages of some raw materials and components. SandN have previously indicated that growth is likely to be stronger in H2 than in H1 This would stem from: 1/ Elective surgeries in US/Europe improving post-Omicron since January, even if staff shortages continue to weigh on the pace of recovery - most evidence in Ortho (knees more than hips) and Sports Med and ENT; 2/ Asia-Pacific not suffering too much from the new round of restrictions/lockdowns, given their local and transitory nature; and 3/ Progressive implementation of Value-Based Purchasing in China (first provinces have started from the end of March). FY22 guidance unchanged FY22 guidance is for revenue to grow 4-5% organically and trading margin to expand by around 50bp y/y (vs 18.0% in FY21). BNPPE expectations for FY22 organic growth and trading margin (5.0% and 18.5%, respectively) stand in line with consensus (5.2% and 18.4%, respectively). Positive share price momentum Benefiting from the sector rotation and early signs of the Omicron wave peaking (with elective surgeries recovering as a consequence), SandN shares have outperformed MedTech by 25% YTD. The positive stock momentum could continue provided the company demonstrates early signs of structurally-higher growth in line with the company''s new mid-term targets (+4-6% organic growth from 2024 onwards), while reassuring on short-term margin trends (cost inflation and China VBP taking a toll in 2022). All eyes are now on new CEO Deepak Nath, who has a...
Smith & Nephew reported better than expected Q1 22 sales, up 5.9% on an underlying basis, driven by broad-based momentum in sports medicine and ENT (+8.6%) and advanced wound management (+8%). Regionally, growth was led by emerging markets (+14.3%) supported by established markets (+4.1%). The FY 22 outlook of 4-5% top-line growth and 50bps trading margin expansion was unchanged. We will marginally upgrade our estimates to reflect the strong Q1 momentum.
Smith & Nephew reported a marginal miss in Q4/FY21 with expected growth trends. The board recommended a final dividend of 23.1c/share and proposed an annual share buy-back programme (worth $250-300m in 2022). FY 22 growth is expected to be 4-5% with a 50bp expansion in the trading margin vs 2021. In addition, the firm announced a change in leadership with Deepak Nath replacing Roland Diggelmann as CEO from 1 April 2021. We will trim our expectations.
Omicron impacted Q4 Four fewer trading days and Omicron led SandN to deliver 0.4% organic growth in Q4 (vs 1.5%e). AWM proved a bit weak (+2.4% vs +5-6%e), while both Orthopaedics (-2.4% vs -3%e) and Sports Med (+2.4% vs +3%e) decelerated sequentially, as expected. From a margin standpoint, the usual seasonality was at work with H2 margin 70bp above H1 (18.3% vs 17.6%). Overall, SandN is meeting the low end of its 2021 guidance of 10-13% organic growth (+10.3%) and 18-19% margin (18.0%). 2022 outlook falls short of expectations SandN is guiding for 4-5% organic growth (consensus at 6% / impact from Covid on hospital staffing shortages and continued supply constraints into Q1 with H2 growth expected to be stronger than H1) and margin expansion of around 50bp (i.e. margin target of around 18.5% vs consensus at 19.0% / 125bp headwind from input cost inflation; 60bp headwind from China volume-based procurement). We cut EPS 22-23e by 3%, as operational cuts (c5%) are partly offset by a lower tax rate (17-18% vs 18.5%e) and share buyback (USD250-300m in FY22). Change of CEO Roland Diggelmann is stepping down as CEO ( by mutual agreement ) from April 2022. He will be replaced by Deepak Nath, who most recently served as President of Diagnostics at Siemens Healthineers from 2018 - Deepak has a solid reputation with investors, having helped SHL to capitalize well on the Covid opportunity, while putting the underlying business back on track. Spared from sector rotation Benefiting from early signs of the Omicron wave peaking (and potential recovery of elective procedures as a consequence) and a well-executed Meet-The-Management in mid-December, SandN shares have outperformed MedTech by 10% YTD. But we suspect the stock momentum may remain capped as most investors will require evidence of structurally-higher growth in line with the company''s new mid-term targets (+4-6% organic growth from 2024 onwards), notably in light of limited earnings upside in the...
''Strategy for Growth'' At its virtual ''Meet the Management'' event held yesterday, SandN presented a strategy underpinned by innovation (building on a strong product portfolio and a pipeline of disruptive technologies), productivity (supply optimisation programmes) and commercial execution (sustained strong profitable growth in Wound Mgmt and Sports Med / re-establishing momentum in Ortho). Initiating a mid-term guidance After the short term effects from Covid and Chinese VBP have washed out throughout 2022-23 (no guidance for these years at this stage), SandN aim to deliver ''consistent 4-6% organic revenue growth from 2024''. This is largely ahead of historic levels (average 3% in the ten years pre-Covid), as innovation may bring momentum across the portfolio (e.g. cementless knee; OR3O in hips; CORI robot; Evos platform in Trauma; next-gen shoulder in Extremities; Tula in ENT). Besides, SandN expects to ''rebuild trading margin'' with a target of at least 21% by 2024e (consensus at 21.2% / 2021 guidance for low-end of 18-19% range) and further improvements thereafter. Capital allocation policy now includes share buyback SandN''s capital allocation prioritizes investment in innovation (both organically and through the acquisition of new technologies and/or expansion in higher growth segments), a progressive dividend policy and a new commitment to return surplus capital to shareholders through a regular annual share buy-back (USD250-300m in 2022e / c2% of current market cap). Sentiment close to hitting a trough? Shares have markedly underperformed (-25% vs sector YTD), due to a marked margin re-set (RandD; MandA dilution), fiercer competition in robotic surgery and the delta variant rising in the US. In terms of valuation, they now trade c.10% above peer ZimmerBiomet, but at a c.30% discount to Stryker, reflecting the latter''s superior growth. With limited earnings upside (cost inflation and China VBP taking a toll in 2022), stock momentum may benefit...
Smith & Nephew reported a soft Q3 21 as sales growth of 2.3% missed estimates. Momentum in wound management (+10.9%) and sports medicine & ENT (+6.5%) was more than offset by the decline in Orthopaedics (-5.9%), which was hurt by the spread of the Delta variant and supply-chain issues. The firm now expects FY21 growth at the lower end of its 10-13% range with a trading profit margin at 18-19%. Following the soft showing, we will trim our estimates and target price.
Q3 trends marginally worse than in H1 With a 1.6% underlying sales decline in 3Q21 vs 3Q19 (+2.3% vs 3Q20), business trends slightly worsened vs 1H21 (-1% vs 1H19). Of note, 3Q21 had a similar number of trading days as in 3Q19 (vs two more trading days in 1H21 vs 1H19). Orthopaedics suffered the most, as the delta variant took a toll on hospital activity in southern US states - this should not come as a major surprise to investors, as this has been flagged by SandN and peers JandJ, Stryker and Orthofix have already warned about its impact. Ex-US, the business continued to improve (eg +13% in EMs). Wound Management more resilient than Orthopaedics Wound proved solid, while Sports Med (younger patients and more outpatient treatments) was less hard-hit than Orthopaedics (knees still underperforming, but things could improve as the all-important cementless knee has been launched). Also, SandN plans to bring Orthopaedics and Sports Medicine under one single leadership team (another back-and-forth in the Group structure). 2021 guidance adjusted to the lower end of the range (delta variant and supply chain issues) SandN now expects to deliver the lower end of the FY21 guidance for 10-13% sales growth (cons. at 12.7%) and trading margin at 18-19% of sales (cons. 18.4%). While the implied deceleration in 4Q21 seems mainly due to four less business days vs 4Q20, a recovery of the knee franchise from 2022 seems possible thanks to the new cementless knee. Overall, we cut our EPS 21-22e by 6%/8%, mainly reflecting more cautious margin assumptions - our TP is cut to 1,400p/shr. Sentiment close to hitting a trough? SandN have markedly underperformed (-23% vs sector YTD), due to a marked margin re-set (RandD, dilution from MandA), fiercer competition in robotic surgery and the rise of the delta variant in the US. They now trade c.10% above peer ZimmerBiomet, but at a c.25% discount to Stryker, reflecting the latter''s superior growth. With limited earnings upside...
There was a lot to like in Smith & Nephew’s (S&N’s) Q2 results. All three of its franchises delivered a very strong performance and two were ahead of pre-COVID levels. Despite heterogeneity by geography, elective surgery levels have recovered (or are recovering) in core markets and there is clear evidence that a focus on commercial execution is delivering value in Wound. Despite this, and our view that S&N has a strong portfolio, we think there is plenty of uncertainty ahead. The impact of COVID-19 and other respiratory viruses in winter remains unknown and the ability of healthcare systems to process patients amidst difficult backlogs is also uncertain. As such, despite upgrading our fair value to 1,450p (from 1,400p), we retain our HOLD recommendation for now.
Smith & Nephew reported consensus beating Q2 21 sales growth of 40.3%, thanks to a strong recovery in Orthopaedics (+43.4%) and ‘sports medicine & ENT’ (+50.9%). Regionally, growth was driven by the established markets (+46.8%). For H1, revenue growth came in at 27.8% with a trading margin of 17.6% (+920bps, 40bps ahead of consensus). Guidance of 10%-13% top-line growth and an 18%-19% trading margin was re-iterated. Following the broadly in-line performance, we do not expect any significant changes to our estimates.
Q2 sales marginally above expectations (up 40% y/y organically / consensus at 36.5%) The easy comps led to strong growth for the Group, with US surgery volumes improving, Europe still lagging (Big 5 markets only starting to recover post lifting of restrictions), and China back to good growth. Sales growth benefited from one extra business day (100-150bp boost to organic growth), while FX and MandA (Integra) added 6.5pp and 1.4pp, respectively. H1 margin marginally below expectations (17.6% vs nearly 18% expected) Margin seasonality should be at the lower end of the range observed in the past years, with H1 margin likely 150-200bp below H2 margin. This is due to several factors, such as the shift of the flagship AAOS congress from H1 to H2, delayed promotional activity, higher freight costs and Integra commercial investments weighted to H2 and calendar effect (4 less business days in 4Q21 vs 4Q20). FY21 guidance reiterated, despite guidance hikes by US peers SandN is sticking to FY21 organic sales growth of 10-13% (cons. +13%). This caution seems due to different geographic split, supply constraints, new restrictions in some countries and four less business days. SandN guides for a trading margin at 18-19% of sales (consensus 18.8%), held back by temporary pressure on gross margin (reduced production) and dilution from RandD (c.100bp), MandA (c.150bp) and FX (c.100bp). SandN assumes little Covid impact on surgery volumes in H2. SandN shares have lagged peers - we remain U/P A marked margin re-set (RandD, dilution from MandA) and fiercer competition in robotic surgery have led to share underperformance YTD. While the resumption of elective surgeries seems captured in consensus sales/margin expectations, SandN shares trade in line with ZimmerBiomet and at a 20% discount to Stryker, reflecting the latter''s superior growth. With limited earnings upside, stock momentum may only come from Orthopaedic peers'' re-rating or ambitious mid-term financial targets.
Smith & Nephew (S&N) reported a reassuring set of Q1 results, with underlying growth of 6.2% supported by increases across all franchises and notably strong performances in Sports Medicine Joint Repair and Advanced Wound Management. Encouragingly, S&N was also able to reinstate its guidance given improving visibility around COVID-19. Following these results, we update our forecasts and now see fair value at 1,400p (from 1,350p). Although we are encouraged by Q1, we think there is still sufficient uncertainty with COVID-19 (which will more likely become apparent in Q3/Q4) to remain cautious at this stage. Hence, we retain our HOLD recommendation.
Q1 sales up 11.5% (+6.2% organic / +1.9% MandA / +3.4% FX) Q1 sales came 8% above expectations - there was a wide dispersion in consensus (between -8% and +4.5% for organic growth in Q1). 1Q21 included two more trading days vs 1Q20 (usually 1-1.5% tailwind per extra day). Q1 organic growth in Orthopaedics (+1.1%) was broadly in line with US peers (JandJ +1.2% / Stryker +0.5%), helped by Trauma (+12%) and Hips (+9%), while Knees (-10%) still suffered from Covid restrictions. The return of elective surgeries lifted Sports Medicine growth to 10%, while improved commercial execution drove 9% growth in AWM. FY21 guidance reinstated, but marginally below consensus expectations SandN expects organic growth of 10-13% (consensus +12%), with reported sales up 14.8-17.8% (consensus +16%). SandN also guides for a trading margin at 18-19% of sales (consensus 19%), held back by a temporary pressure on gross margin (reduced production), compounded by dilution from RandD investment (c.100bp), MandA (c.150bp) and FX (c.100bp). SandN assumes an improvement in conditions through 2021, with surgery volumes largely unconstrained by Covid in H2. Consensus expectations likely unchanged We have slightly raised our EPS expectations for 2021-22e, but still stand 1-3% below consensus. Our TP increase mainly stems from the roll-over of our DCF into 2021. Shares up 15% from their lows in late March - we remain U/P A marked margin re-set (increased RandD spending, dilution from MandA) and fiercer competition on the agenda in robotic surgery (ZimmerBiomet; JandJ) have led to another round of underperformance for the shares YTD. But the progressive resumption of elective surgeries has allowed SandN shares to recover lately, which now trade in line with ZimmerBiomet and at a 15-20% discount to Stryker, reflecting the latter''s superior growth profile. With limited earnings upside, renewed stock momentum may only stem from Orthopaedic peers'' re-rating or the introduction of ambitious...
Smith & Nephew reported consensus-beating Q1 21 sales growth of 6.2%, driven by ‘sports medicine & ENT’ (+10.4%) and ‘advanced wound management’ (+9.3%). Regionally, growth was driven by emerging markets (+21.8%) and the US (+7.1%), which made up for the 1.8% decline in other established markets. The firm also reinstated the outlook and now expects FY21 underlying growth of 10-13% with a trading profit margin of 18-19%. We will raise our estimates and target price, following the strong performance.
We upgrade our recommendation on Smith & Nephew (S&N) to HOLD (from Sell) with a fair value of 1,350p. Our updated forecasts assume that S&N can return to our prepandemic estimates within two years, as the backlog in elective surgery is cleared. Although there are clearly risks to the downside (e.g. the emergence of new variants of SARS-COV-2), we see more risks to the upside and are also encouraged that S&N’s M&A strategy now feels more aligned with what we would view as most likely to be value accretive. Despite the overall balance of risks meaning we aren’t sufficiently positive to turn a Buy at these levels; we look for evidence of a faster of recovery in elective procedures as the next catalyst to revisit our forecasts.
Smith & Nephew reported an in line Q4/FY20 top line (-7.1%/-12.1%). The Q4 decline was attributable to other reconstruction (-45.6%), knees (-16.2%) and ENT (-33.1%), while Hips surprised with a flattish performance (-0.5%) in a difficult operating environment. The firm missed profit estimates, as trading profit fell 42% (margin -7.8pp to 15%). The dividend of 37.5c/share was unchanged from the prior year. FY21 sales/profit outlook remains suspended due to COVID-19 uncertainties. We will lower our estimates to factor in the softer than expected bottom-line showing.
Q4 sales pre-announced down 7.1% Mid-January, SandN pre-announced a 4Q20 underlying sales decline of c.7% (below consensus expectations of -1% at the time), leading to FY20 underlying sales decline of approx. 12%. Sales were impacted by surging Covid-19 infection rates from mid-October, particularly in the US and Europe where more procedures were postponed following the reintroduction of restrictions. H2 margin at 20.2% of sales (down 380bp y/y) vs consensus at 21.4% SandN has long been indicating that 2020 trading profit margin will be substantially down y/y, with negative operating leverage due to lower volumes partially offset by cost control measures. FY20 margin of 15.0% (down 780bp y/y) ends up being below consensus expectations for 15.6%. Cautious, qualitative 2021 guidance - weak start in 2021 given ongoing restrictions Despite the continuation of Covid impact in H1 and the uncertainty regarding the timing and pace of recovery , SandN expects to deliver substantial underlying growth compared to 2020 and an improved trading margin over 2020 . Relative to 2019 (22.8% margin), SandN anticipate several profitability headwinds - reduced production weighing on gross margin, and a combined 350bp headwind from increased RandD (100bp), dilution from acquisitions (150bp) and FX (100bp) - overall, this suggests that FY21 trading margin may reach 19% at best (consensus was at 21%). Best-in-class peer Stryker has come up with a 2021 guidance (organic growth to be in the range of 8-10% vs 2019 / pricing environment consistent with 2019-20), but ZimmerBiomet has not. The risk of a W-shaped recovery Our raised sales expectations for 2021-22 are more-than-offset by substantial margin cuts, as some headwinds will take time to vanish (increased RandD spending, dilution from MandA). With fiercer competition on the agenda in robotic surgery and knee, and the risk of a re-run of the aftermath of the 2008-09 crisis that led to a step-up in price pressure, we...
Q3 sales down 4.2% organically, in line with pre-announcement All three franchises showed significant recovery (Q2 underlying sales decline was 29%), but the improvement was strongest in Orthopaedics, mainly helped by the hip business growing 7% (more urgent cases, successful roll-out of OR3O). Conversely, AWM proved weak vs peers (mix effect). Recovery already seems from the past Some postponements/cancellations for elective surgeries have started being imposed across some European countries. While the scope/duration of these restrictions is impossible to assess, SandN expects the second wave to be less harsh than the first (hospitals better prepared). However, the company is now preparing to see the impact of Covid spiking again in Q4 and remaining in H1 21. Still no 2020 guidance (unsurprising given the context) - concerns about 2021 We have tweaked our sales/EBIT estimates for 2020 (see below). But we are more concerned about a prolonged effect into 2021, since consensus is expecting 2021 sales (USD5.35bn) to be broadly in line with 2019 levels (USD5.15bn), once accounting for 3pp of external growth over 2020-21e (mainly Osiris and Integra Extremities) - we now stand 5% below with USD5.1bn. H1 trading profit 24% below expectations as margin shed almost 13pp y/y In the short term, the negative operating leverage (lower sales) and the FX transactional headwind (50bp for 2020-21) more than offset savings (travel, sales commissions). Also, SandN will continue to ring fence RandD. Longer term, SandN does not rule out some of the current savings becoming structural as it is assessing how to engage differently with customers (less travel, more digital tools). Overall, we remain concerned about SandN''s ability to return to the 22-23% margin range. The risk of a W-shaped recovery With many care providers now facing a second Covid wave, SandN shares have lost further momentum of late, despite the astute acquisition of Integra (late Sep). With fiercer...
Smith and Nephew reports 3Q20 results on Thursday 29th October at 7am GMT, with a conference call to follow at 830am. Smith & Nephew has already announced that for 3Q underlying revenue declined -4% (1 October), with “significant recovery” across all three franchises. Hence we expect much of the focus around the pace of the recovery in elective (orthopaedic) procedures in the US in particular, and what this implies for 4Q and the full year. Analyst consensus is for FY20 revenues -10% underlying (at the midpoint of the - 12% to -8% range), with 1Q to 3Q at -7.6% / -29.3% / -4%, this implies Q4 revenues broadly flat. Hence we see the opportunity for some relief to the downward pressure on the shares if management commentary at the 3Q results suggests more positive trends. Recall that Smith and Nephew’s financial guidance for FY 2020 was withdrawn in February, and as yet remains withdrawn3Q20 Preview: Outlook in focus
SandN buying Integra LifeSciences'' Extremity Orthopaedics business for USD240m The business generated revenue of USD90m in 2019 and is expected to grow in the double digits. Trading at a small loss, it will be slightly dilutive to trading profit in 2021-22 (we estimate 30-40bp), which explains the reasonable price paid for the asset (c.2.7x 2019 sales). SandN expects the ROIC from the deal to meet or exceed their WACC by the fifth year. The deal should close by year-end. The acquisition supports SandN''s strategy of investing in higher-growth segments This acquisition will nicely complement SandN''s extremities business (entry into the shoulder replacement and foot and ankle segments), a market that has been growing in the high single-digits of late. The deal also adds a specialised sales force (US mainly, but also in Canada/Europe), a strong product pipeline, 300 employees and two facilities (US and France). Innovation and commercial synergies key to turning around the sales trajectory Integra''s Extremity Orthopaedics pipeline includes a highly-promising, next-generation shoulder replacement system, which is expected to be ready for full commercial launch in 2022. Compounded by the broader commercial reach from joining SandN, this should allow the sales trends to be reinvigorated after the lacklustre trends seen since 2016 (see chart below). Overall, we expect the deal to add 20bp to SandN''s organic growth profile (now seen at 3.2% in 2022-23e). Deal broadly neutral to EPS expectations Assuming consolidation from early 2021 onwards, we increase Group sales by c.1.5% in both 2021 and 2022, while our EPS expectations remain broadly unchanged. Care providers slowly recovering from Covid A re-run of the aftermath of the 2008-09 crisis would lead to a step-up in price pressure, limiting SandN''s ability to restore margins to the (pre-Covid) 22-23% range even when volumes normalize. Coupled with the risk of a W-shape recovery in elective surgery and...
SandN has held a virtual event focused on innovation The CEO stressed that innovation is a clear strategic pillar and he expects an accelerated pace of launches, as SandN maintained RandD spending during the pandemic (RandD costs at 7.3% of H1 20 sales vs 5-6% usually). SandN ambitions to move from a product company to a provider of integrated healthcare solutions to better align with market trends: a greater share of outpatient procedures, outcome-focused payers, lower costs for care providers and increased patient engagement. Compelling clinical evidence needed to foster the adoption of robotic surgery SandN presented clinical data from unicompartmental knee procedures showing improved patient outcomes, shortened length of stay, faster return to sport and cost reduction (less revision). There is also a need for more surgeon education and fewer Capex constraints (notably in Europe). CORI is SandN''s next-generation robotic platform for Orthopaedics Launched in the US in July, CORI is faster and more precise than Navio, while still offering a portable handpiece, a small footprint and no need for a pre-op CT scan. All these features make it different from major competitors, but share gains remain uncertain in our view. INTELLIO offering enabling Technology in Sports Med SandN currently has 5,000 towers installed in arthroscopic suites across top 10 markets. INTELLIO Connected Tower combines visualization (LENS 4K Imaging), mechanical resection (Dyonics Platinum), Coblation technology (FLOW90) and fluid management, thereby improving the efficiency in the operating room. Next-generation towers may offer both Sports Med and Ortho applications. Major product launches as care providers are slowly recovering from Covid A rerun of the aftermath of the 2008-09 crisis would lead to a step-up in price pressure and a durable slowdown in growth in the hip/knee market, thereby limiting SandN''s ability to restore margins in the (pre-Covid) 22-23% range even when...
Smith & Nephew reported big declines in Q2 20 with sales down 29.3% on an underlying basis – driven by broad-based declines – and the H1 20 trading profit margin contracting by 12.9pp (to 8.5%). However, the company announced an interim dividend of $0.144 per share (flat). FY 20 guidance remains withdrawn, thanks to the persistent pandemic uncertainty. In spite of the soft profit numbers, we will be raising our estimates to account for the faster than expected recovery in elective surgeries.
Q2 sales down 29.3% organically, in line with pre-announcement Covid has impacted Recon (-37%), Sports Med (-32%) and ENT (-44%) the most, driven by lower levels of elective surgery. Wound Mgmt (-18%) and Trauma (-11%) have been more resilient. H1 trading profit 24% below expectations as margin shed almost 13pp y/y SandN had said that the H1 trading margin would be substantially down on the prior year, while the consensus range was wide (5.6-13.9%). The pandemic has badly hurt the gross margin (down 560bp y/y) due to an increase in provisions (USD50m for inventory excess/obsolescence and bad debt) and factory underutilisation, while negative leverage has emerged due to fixed SGandA costs. Discretionary cost savings of approx USD150m were delivered in H1 (USD200m for FY20e). No 2020 guidance yet The CEO stressed, ''There remain many uncertainties as countries continue to battle Covid. But he said that July was good, notably in the US (pent-up demand; little impact from renewed local restrictions). Europe is trickier (public systems; patients'' behaviour; UK and Eastern Europe lagging). We cut our EPS 20e by 9% but marginally raise EPS 21e by 2% Following better-than-feared Q2 sales, we are raising our 2020-21 sales expectations - we now expect sales to return to their 2019 level by 2021e. However, we leave our margin estimates from 2021 unchanged as savings measures fail to fully offset earnings de-leverage and price pressure. A new round of durable price pressure could hurt the Orthopaedics industry A rerun of the aftermath of the 2008-09 crisis would lead to a step-up in price pressure and a durable slowdown in growth in the hip/knee market. This would obviously limit SandN''s ability to restore margins in the (pre-Covid) 22-23% range even when volumes have normalized. Limited de-rating of the shares leaves room for disappointment - Underperform reiterated SandN shares now trade in line with US peer Stryker, with an unbalanced risk/reward in...
Smith & Nephew saw Q1 20 revenue decline by 7.6%, on an underlying basis – driven by broad-based weakness, as the COVID-19 outbreak hurt elective procedure volumes. With April revenue down 47%, there is more pain ahead before recovery. However, with procedure volumes returning in key markets, a recovery in H2 looks realistic. Following the Q1 update, we do not expect any significant change in estimates as the Q1 numbers as well as April trading were only marginally better than our estimates.
ValuEngine Rating and Forecast Report for SNN
Smith & Nephew reported good Q4/FY 19 numbers – trumping estimates. Q4/FY 19 sales were up 5.6%/4.4% on an underlying basis – driven by broad-based momentum. For FY19, the trading profit margin came in at 22.8%. The company also announced a final dividend of $0.231 per share (+4%). Management expects FY 20 revenue growth of 3.5-4.5% with a trading margin at or slightly above the FY 19 level (22.8%). Following the good performance, we will be raising our estimates and target price.
Following on from a surprisingly, in our view, strong 2019 for the healthcare sector (US +20% / Europe +28%) we see the momentum carrying through to the first six months of 2020 and moderating somewhat into the 2H ahead of the US presidential election. Resurgent M&A (with no less than four deals, with an aggregate value of >$14bn, announced), together with a surprise comeback for Biogen’s Alzheimer hopeful aducanumab, bolstered the sector into year-end and leave the mood upbeat into the new year. We see many of the same themes persisting over the next twelve months – with valuations supported by sound fundamentals (impressive innovation, a strong US financing environment and M&A) despite headwinds from US drug pricing rhetoric. We continue to prefer mature companies with an attractive/improving growth outlook (AstraZeneca/Convatec) and small/mid-cap companies with exposure to significant growth opportunities (Amryt/Oxford Biodynamics).
SN/ GSK AZN CTEC OBD AMYT
Smith & Nephew reported Q3 19 top-line growth of 4% on an underlying basis – driven by Sports Medicine Joint Repair (+12.2%), Advanced Wound Devices (+15.4%), Knee Implants (+4.6%) and ENT (+5.3%). This was partly offset by a decline in Advanced Wound care (-1.8%). Management upgraded FY 19 revenue expectations to 3.5-4.5% (vs 3-4% earlier), while lowering the trading margin expectation to 22.8% (vs 22.8-23.2%). Following the good Q3, we will be raising our estimates and target price.
Smith & Nephew (S&N) recently (31st Oct) reported Q3 2019 results, providing further evidence that its new commercial model is driving a return to market growth rates. However, trading profit margin guidance was narrowed down as a result of the impact of FX, acquisitions and ongoing investment. We continue to believe that growth remains the priority over margin expansion and still see a risk from the potential for large scale M&A (as exemplified by the recent Stryker-Wright Medical transaction). We make minimal changes to our forecasts following the results and retain our fair value of 1500p. Our SELL stance remains predicated on M&A risk and we await the thoughts of new CEO Roland Diggelmann at S&N’s full year 2019 results.
Smith & Nephew (S&N) recently (31st July) delivered a good set of Q2 results and upgraded its revenue guidance whilst retaining trading margin expectations. We believe the results show the impact of the new commercial model and have upgraded our revenue estimates consistent with the new guidance. We now see S&N achieving market growth rates by FY 2020F (previously FY 2022F). We retain our view that growth will take precedence over margin expansion and keep our assumption of 40 bps YoY progression. MedTech valuations remain elevated and key competitors are focused on M&A, hence we still a risk of overpaying for growth assets. Our fair value increases to 1,500p (from 1,440p) but, following a strong run in the shares (20% since May), we still see c20% downside. SELL.
Smith & Nephew reported a strong set of Q2 19 numbers. Sales were up 3.5% on an underlying basis, driven by Sports Medicine Joint Repair, Knee and Advanced Wound Devices. Regionally, emerging markets led the growth. H1 19 trading profit came in at $532m, with the associated margin at 21.4%. The company announced an interim dividend of 14.4c per share. Management raised FY 19 revenue guidance to 3-4%. Following the strong Q2, we will be raising our estimates.
Smith & Nephew (S&N) will report its Q2 2019 results on the 31st July 2019 at 7am with a conference call to follow at 8.30am. We expect a continuation of a number of trends from Q1 2019, albeit the underlying growth rate is likely to be lower than Q1 given an easier comparator for the former. Consensus is for a 40bps H1 trading profit margin increase, although this could be constrained by acquisitions (notably Osiris) in our view.
Smith & Nephew (S&N) have announced this morning the acquisition of Atracsys Sàrl, a Switzerland-based provider of tracking technology that is used in computer-assisted surgery. S&N expects the optical tracking camera (fusionTrack 500) to be used as part of its next-generation robotics platform which is due for commercial release in 2020. The acquisition is expected to complete in Q3 2019 and commercial terms have not been disclosed.
Smith & Nephew (S&N) is in the midst of a cultural and operational transformation led by new CEO Namal Nawana. Early evidence is encouraging with the company reporting a return to market growth at Q1 19 on a Group level. Our analysis leaves us comfortable that S&N has a sufficiently competitive portfolio in Orthopaedics (Reconstruction and Sports Medicine), with recent under-performance more likely reflective of weak commercial execution. We are less positive on Wound, where we see commoditised markets facing negative pricing as less attractive. We see potential upside from the ongoing APEX cost savings programme and ample opportunity from SG&A in the nearterm. However, we believe that sustainable growth, both on the top and bottom line, will take time and while the recent improvements and changes to the commercial structure are supportive, it is still relatively early. Furthermore, we see M&A as an over-hang in the near-term, with the new management team demonstrating an increased appetite for largescale M&A, supported by a healthy balance sheet, but the market weary of stretched valuations. In the context of recent performance (+17% YTD vs the FTSE AllShare +8%) we see the current valuation at 21x forward earnings for modest growth versus peers as stretched. SELL.
Smith & Nephew reported Q1 19 sales growth of 4.4% on an underlying basis – driven by Sports Medicine Joint Repair (+11%), Advanced Wound Devices (+16.4%), Knee Implants (+4.1%) and Trauma (+4.8%). In contrast, Arthroscopic Enabling Technologies (-1.1%) and Advanced Wound Bioactives (+0.4%) came in soft. Management upgraded revenue expectations to the higher end of earlier guidance (2.5-3.5%), while re-iterating the trading profit expectation (22.8-23.2%). Following the good start to Q1, we will be raising our estimates and target price.
Smith & Nephew Q4/FY 2018 numbers were in line with estimates. Q4/FY 18 revenue was up by 3%/2% to $1,294m/$4,904m, driven by sports medicine joint repair, other surgical businesses and advanced wound devices. FY18 trading profit grew by 7% to $1,123m with the associated margin coming in at 22.9% and a dividend of $0.36 per share was announced. FY 19 guidance – revenue growth of 2.5-3.5% and trading profit margin of 22.8-23.2%. We do not expect any major change in our estimates.
Smith and Nephew recently announced its Q3 trading update. Revenue was in line with expectations, coming in at $1,169m, up 3% on an underlying basis. Growth was largely driven by sports medicine joint repair, other surgical businesses and advanced wound devices. On the other hand, arthroscopic enabling technologies and advanced wound bioactives weighed on growth. The big (positive) surprises, though, were the knee segment and the US region. Our recommendation remains unchanged in spite of marginal changes in our estimates.
We had the opportunity to join Smith & Nephew’s (S&N) recent institutional investor roadshow and hear about the introspection that has emerged following the appointment of its new CEO. While endorsing its strategy as a portfolio medical device company, two strategic reviews have identified areas which, when the detail is announced at the Q3 and FY18 results, will enable investors to track S&N’s target of returning to market growth rates.
Smith & Nephew reported largely in line Q2 numbers – on both the top-line as well as the bottomline. The performance of the sports medicine joint repair, other surgical devices, knee implants and advanced wound devices segments were the key positives, while advanced wound bioactives, arthroscopic enabling technologies and trauma businesses posted sales declines. We do not expect any significant changes to our estimates/recommendation.
Smith and Nephew reported a weaker-than-expected Q1 trading performance. The performance of the sports medicine portfolio and continued momentum in China were the key positives, but the Bioactives business and the deepening seasonality/budget constraints in developed markets were concerning. We will be revising our estimates downwards while maintaining an Add recommendation.
Solid performance across key revenue segments resulted in a strong Q4 17 performance for S&N. With China back to double-digit growth and the Gulf weakness now behind, the road ahead looks promising. Focus on cost control coupled with a strong top-line growth should translate into higher profit margins. In addition, the US tax reforms should help earnings march higher (4-5% drop in tax rate). We reset our estimates slightly higher and issue an Add recommendation on the stock.
Smith & Nephew’s (S&N) FY17 revenues of $4.77bn and trading profit of $1,048m were slightly below consensus estimates despite a strong Q4, which saw a reported 5% y-o-y growth. EPS exceeded consensus estimates. S&N’s emerging market business retained its star billing for growth across all its geographies. A core focus of the business now appears to be improvement via the newly named, but broad-ranging APEX cost reduction and efficiency programme. Last year’s announcement on the retirement of its CEO seems to have taken on a slow and steady route to CEO transition, with the high-level commitment, involvement and execution on the APEX programme.
Smith & Nephew's Q317 results featured 9% revenue growth in emerging markets that continued the trend of previous quarters. A further efficiency review looks likely to focus on reducing complexity in manufacturing and warehousing, improving the G&A ratio and continued salesforce efficiency. A narrowing of the FY revenue and profit growth expectations towards the lower end of the previously guided range may have disappointed some, but this close to the year-end there should be confidence that the revised FY ranges will remain intact. Management does not comment on M&A speculation, but with the recently announced retirement of its CEO, S&N’s continued strength in the attractive emerging markets and rumoured activist interest look likely to stoke further media speculation.
After a disappointing end to FY 16, Smith & Nephew (S&N) exhibited improved sequential sales evolution in Q1 17 (trading update, only sales disclosed) – underlying sales grew 3% (the highest since Q1 16) to $1.1bn, in line with consensus expectations. However, a negative disposal impact of 2% and a currency headwind of 1% neutralised the underlying expansion, resulting in the reported growth being flat. On a geographical basis, the underlying recovery was primarily driven by the strong uptick in emerging markets growth (12% vs. 3% in Q4 16 and -6% in Q1 16) on the back of a sturdy Chinese performance (+14%) and annualisation of the Gulf headwinds. Meanwhile, established markets (including both the US and other established markets) remained weak, recording an underlying growth of 1%. Notably, franchise-wise (underlying basis), advanced wound care turned positive (1%; after remaining flat or negative throughout FY 16) while knee implants (5%. vs. +9% in Q1 16), sports medicine joint repair (7% vs. 11% in Q1 16), trauma & extremities (5% vs. -7% in Q1 16) and advanced wound devices (+16% vs. Q1 16: +11%) all contributed healthily. Conversely, hip implants remained flat (vs. +4% in Q1 16) while weak arthroscopic-enabling technologies (-1% vs. Q1 16: +4%) and advanced wound bioactives (-8% vs. Q1 16: -4%) adversely impacted the performance. Based on current exchange rates, management now expects a currency headwind of 0.6% (previously 1%). Factoring in the reduced currency headwind, management has slightly increased its reported revenue growth estimate to 1.6-2.6% from the previous 1.2-2.2% while maintaining its underlying revenue guidance of 3-4%.
Smith & Nephew's Q117 demonstrated a return to double-digit growth in emerging markets, with China growing 14% in the quarter. Alongside completion of its restructuring and focus on the execution of improved innovation and efficiency, we believe this improvement in emerging markets will keep S&N on track to meet its current revenue growth (3-4%) and trading profit margin targets for FY17.
Smith & Nephew (S&N) ended the year on a weak note with Q4 16 sales of $1.2bn coming in below both our as well as consensus estimates. For the first time in the last two years, the company recorded an underlying revenue contraction (1%), further accentuated by a negative currency impact (1%) and disposal headwinds (1%) resulting in an overall 3% decline. Franchise wise (underlying basis), knee implants (flat vs. +4% in Q3), hip implants (-6% vs. flat in Q3), arthroscopic enabling technologies (-3 vs. Q3: +2%), trauma and extremities (-4% vs. +1% in Q3), advanced wound care (-3% vs. -2% in Q3) and sports medicine joint repair (growth receded to 5% from 8% vs. in Q3) negatively impacted the performance. For FY 16, while sales were marginally lower, operating profit was clearly below ours as well as the street’s estimates. With China and the Gulf together shaving off more than 1%, top-line expanded by just 1% (+2% underlying basis) to $4.7bn. Lower sales growth translated into weak profitability with trading profit margin sinking 190bp to 21.8% (despite benefits from the Group Optimisation programme), further impacted by forex headwinds (120 bp), dilution from the Blue Belt acquisition (60bp) and the Gynaecology business divestment (10bp). The company has declared a final dividend of $0.185 per share resulting in a flat yoy full-year dividend of $.31 per share (£0.248 per share at CER, reflecting a yoy growth of c.20% due to sterling’s depreciation) while also completing a $300m share buy-back following the disposal of its Gynaecology business for $350m. Expecting receding headwinds (discussed below), management has guided for an accelerated underlying revenue growth of 3-4%, to be partially curtailed by a forex headwind of 1% and 80bp dilution from the Gynaecology business, resulting in an expectation of 1.2-2.2% reported growth (below our previous expectation of a 3.3% reported growth) while guiding for a 20-70bp trading profit margin expansion. Separately, Smith & Nephew became the next company to concede to shareholder backlash over executive pay following a weak FY 16 performance. CEO Olivier Bohuon’s 2016 pay package has been slashed by 38% to $3.3m including a 10% cut in the cash bonus while also freezing the base salary for FY 17. The company has also proposed a revamped remuneration policy aligning its annual incentive plan slightly more with the company’s financial performance (75% weight vs. 70% in 2015, while the absolute trading profit metric has been replaced by trading profit margin). As a reminder 53% of shareholders had rejected the company’s 2015 remuneration report in its April 2016 AGM.
Smith & Nephew (S&N) delivered a fair Q4 and FY16, which were affected by tough market conditions in China and the Gulf states. However, the company has announced that its fundamental restructuring is complete, enabling a stronger 2017 and beyond.
Smith & Nephew’s (S&N) sluggish underlying top-line performance continued for the second consecutive quarter (+2% vs. Q2 16: +2% and Q1 16: +4%) in Q3 (trading update, only revenue disclosed), primarily reflecting a continued decline in advanced wound management (although a lower contraction of 1% vs. 3% in Q2 16). Overall, reported revenue grew 1% to $1.12bn, restricted by a negative disposal impact of 1% related to the divestment of the Gynaecology business. Franchise-wise (underlying basis), we view the sequential turn around in trauma and extremities (+1% vs. -6% in Q2 16) – primarily due to the recovery in China – as the major positive highlight, while the advanced wound bioactives’ unexpected decline (-3% vs. 4% in Q2 16 and 2% in Q3 15) was a major source of disappointment. Sports medicine joint repair (+8% vs. +10% in Q2 16) and knee implants (+4% vs. +5% in Q2 16) remained resilient while hip implants were flat and advanced wound care remained feeble (-2%). Geographically, emerging markets posted a strong sequential improvement (6% compared to -2% in Q2 16) driven by the recovery in China (high single-digit growth) while the US expanded 2% and other established markets were flat. Separately, S&N has appointed Graham Baker as the group’s new CFO (slated to join from 1 March 2017) who will be replacing the previous CFO Julie Brown. Following the unexpected weak performance of advanced wound bioactives, management now expects a flat annual revenue growth compared to the previous mid single-digit growth for the division along with continued Gulf woes. However, it anticipates the positive momentum at recon, sports medicine and the improvement in China to continue, while the Gulf should remain weak. It reiterated its expectation of a stronger trading margin for H2, albeit somewhat held back by negative operational gearing following lower sales growth. Furthermore, it has lowered its tax rate guidance for FY 16 to c.24.5% from the previous forecast of c. 26.5% due to a one-off tax provision gain.
Smith & Nephew (S&N) reported Q3 results in line with consensus. Following slower revenue growth than expected by management in H1, Q3 results indicate an improvement, particularly in emerging markets, which reported 6% revenue growth as the outlook in China improves. Significant revenue contributions continue to come from Sports Medicine Joint Repair and Knee Implants, although Wound Care remains weak. S&N’s 3% premium rating on 2016e P/E to the average of its global orthopaedic peers is underpinned by evidence of improving growth prospects.
Smith & Nephew posted Q2/H1 16 results marginally below consensus expectations (both top-line and profitability). Q2 revenue growth slowed a tad sequentially (+2% vs. +3% in Q1 16) and represented underlying growth of 2% and an acquisition benefit of 1%, offset by a 1% currency headwind (persistent issues in China and the Gulf shaved off 1.5ppt from the growth). Positive highlights (all growth figures presented on an underlying basis) during the quarter included continued strength in sports medicine joint repair (+10% vs. 11% in Q1 16) and knee implants (+5%, although a c.4% decline on a qoq basis) along with a sequential turnaround in advanced wound bioactives (+4% vs. -4% in Q1 16). Hip implants, as expected, remained flat while trauma and extremities continued to underperform (-6% vs. -7% in Q1 16) due to continued sluggishness in China and the Gulf states. However, the magnitude of the decline in advanced wound care (-7% vs. flat growth in Q1 16, +12% in Q2 15) negatively surprised. Geographically, established markets were up 3% (Q2 15: +3% & Q1 16: +6%) with US markets expanding +4% and other established markets by +1% while emerging markets, as expected, continued their negative momentum by registering a fall of 2% (albeit at a slower pace ? Q1 16: -6%). Forex headwinds along with the sales weakness in Emerging economies and dilution from the Blue Belt acquisition (management has guided for a 60bp margin dilution for FY 16) resulted in the trading profit falling c.6% to $483m in H1 16 (margin down 170bp to 20.8%). Moving further down, despite the lower tax burden (effective tax rate of 26.3% rate vs. 27.2% in H1 15), operating weakness seeped through to the bottom line with adjusted net profit declining c.5% to $334m (down c.18% on a reported basis). Management has guided for a stronger trading margin for H2 while expecting a forex headwind of 1% for FY 16 (previously 0-1%). Overall, it expects trading margin to be slightly softer than the previous guidance of =>24% on an underlying basis due to dilution from the Gynaecology business disposal (-20bp margin impact) and sales weakness in China and the Gulf. An interim dividend of $0.123 per share (£0.094 per share at CER as of 27 July 2016, reflecting a yoy growth of c.20%) has been announced.
Smith & Nephew’s Q1 16 results (trading update) came in marginally below analysts’ expectation (sales of $1.14bn vs. consensus estimate of $1.17bn). The revenue growth of 3% was a function of underlying growth of 4%, acquisition benefits of 2% and currency headwinds of 3%. Franchise-wise, the robust performance of sports medicine, knee/hip implants and advanced wound devices was negated to some extent by the underperformance of trauma & extremities and advanced wound bioactives. Management has maintained its FY 16 outlook of good underlying revenue growth (not quantified). The forex situation has slightly improved and management now sees a negative impact of 0-1% (from an earlier 2 -3%) on full-year revenue. Margins, however, are unlikely to see the benefit as the company has already hedged its FY 16 forex exposure. Divestment of the Gynaecology business Following the Q1 results, the company announced the divestment of its Gynaecology business (reported under the sub-segment, other surgical businesses) to Medtronic for $350m as part of its strategy to focus on its core operations. With 2015 sales of $56m (c.1% of the company’s revenue), the deal consideration translates into an attractive 6.3x EV/Sales multiple. The sales proceeds will be used to buy back shares worth $300m. The divestment is expected to be completed in July 2016.
*FY 15 slightly above expectations* Smith & Nephew closed FY 15 on a strong foot, with both revenue and core operating profit coming in slightly ahead of ours as well as consensus estimates. Q4 15 revenue came in at $1,257m, c.3% higher than our estimate. Reported growth of 1% yoy represented underlying growth of 5%, with an acquisition impact of 2% and forex headwinds of 6%. The recovery in (all revenue growth rates are on an underlying basis unless specified otherwise) sports medicine joint repair (+9%; Q3: +4%), arthroscopic-enabling technologies (+3%; Q3: -2%) and advanced wound bioactives (+16%; Q3: +2%) complemented the continuing strong momentum in knee implants (+6%; Q3: +6%) and advanced wound devices (+14%; Q3: +17%). Geographically, established markets were up 6% (the highest since 2012), with the US growing at 9% and ex-US at 2%. As expected, emerging markets at 2% growth were held back by China which registered a decline (excluding China, they grew by 15%). For the full year, both revenue and core operating profit were up 4% to $4,634m (vs. our estimate of $4,592m; flat in $ including acquisition benefits of +4% and currency impacts of -8%) and $1,099m (against our expectation of $1,055m; the margin improved 87bp to c.23.7%), respectively. However, reported net profit came in below expectations at $410m, mainly due to the $203m charge recognised in Q4 15 in relation to metal-on-metal claims on its Birmingham hip replacement products. The company announced a final dividend of $0.19 per share, taking the total dividend for the year to $0.308 per share (+4% yoy). For FY 16, management sees good underlying revenue growth (not quantified) with a negative forex impact of c.2-3%, but expects the core operating profit margin to be severely impacted by currencies (120bp) and the Blue Belt acquisition (60bps). Stripping out currency, management expects the core operating profit margin to reach or exceed 24%.
Smith & Nephew announced a rather soft Q3 trading update (it provides only top-line numbers), with sales coming in below market expectations, mainly due to weak demand from China and the strengthening of the US dollar. Revenue was down 4% yoy to $1.1bn, as forex headwinds of 9% eclipsed underlying growth of 4%. As expected, the sharp decline in acquisition benefit (1ppt vs 6ppts in Q2 15) added to the muted results. While management has maintained its FY 15 guidance of a higher underlying revenue growth and an improvement in trading profit margin compared to FY 14, the estimates for the forex impact have been raised from 7% to 8%. Along with the trading update, the company announced the acquisition of a surgical robotic company, Blue Belt Technologies, for $275m. It also conducted a capital markets day on 10 November 2015, with a focus on the Advanced Wound Management segment.
After a sluggish FY 14, S&N’s performance in H1 15 was more encouraging with results coming in line with market expectations. Revenue grew 2% yoy to $2.3bn (up 4% on an underlying basis) with a 9% currency headwind partially offsetting the 7% benefit from acquisitions (primarily ArthroCare). The Q2 underlying performance was a shade better at 5%, while reported growth stayed put at 2%. However, unlike the previous quarter, the second quarter growth was driven by an improved performance in Reconstruction (especially the knees franchise) and Advanced Wound Management, which registered underlying growths of 4% and 7%, respectively vs. 1% for both businesses in Q1 15. Successful implementation of cost savings programmes – management claims to have realised c.$50m (run rate annualised) of the total $120m cost savings plan – translated into heathier margins (adjusted EBITDA and EBIT improved by c.300bp and c.190bp to 29.6% and 19.1%, respectively. A $99m receipt from the settlement of a patent infringement judgment against Arthrex (net benefit - $45m), dropped down to the bottom line, facilitating a c.220bp improvement in the net margin to 13%. Management has announced an interim dividend of $0.118 per share, while maintaining its FY 15 guidance for higher underlying growth with an expected 7% currency headwind.
Smith & Nephew’s growth acceleration and margin expansion in Q2 should continue in H215, more reflecting internal changes than improvements in market fundamentals. Its c 13% premium on 2015 P/E to its global ortho peers is supported by its brisker growth and strategic value.
Share: