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04 Nov 2021
Margins re-set (again)
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Margins re-set (again)
Smith & Nephew plc (SN:LON) | 985 88.7 0.9% | Mkt Cap: 8,612m
- Published:
04 Nov 2021 -
Author:
Dormois Julien JD -
Pages:
11
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...