Yahoo Finance It may not be sprinting ahead, but Smith & Nephew is still in the race – so don’t write it off
Smith & Nephew remains a source of disappointment, as our thesis that the orthopaedics, wound care and sports medicines specialist could be an ideal Covid-19 recovery play is yet to really prove itself.
A paper loss of 16pc over two years is testing even this column’s patience, although that deficit is partially offset by more than 58p a share in dividends (with more to come, upon receipt of the 23.1 US cents per share final payment for fiscal 2022 on May 17).
However, last month’s full-year results, and especially the medium-term plan outlined by chief executive Deepak Nath, offer enough to merit ongoing portfolio inclusion, albeit as one of the names primed for the chop in the event of any further disappointment.
The premise that Smith & Nephew would benefit as Covid is beaten off and volumes of non-elective surgical procedures rise, more patients return to hospital for ear, nose and throat operations and sporting injuries increase as athletes returned to competition still seems sound. But Smith & Nephew is yet to show any great benefit.
Although sales grew by 5pc on an underlying basis in 2022, operating profit and operating margin fell, cash flow shrank, returns on capital remained relatively low and the dividend remained stuck at the same level as 2019, 37.5 US cents a share.
A 7pc increase in full-year sales at sports medicine and 8pc in wound care looked good but orthopaedics, still two fifths of the business, lagged with a 2pc underlying increase.
Yet it is here that the opportunity could still lie. Supply chain disruptions, increased freight costs and China’s switch to buying higher volumes of product in exchange for lower prices have all worked against Smith & Nephew.
The FTSE 100 firm is responding to these input cost challenges with a new 12-point plan to improve performance at orthopaedics, drive productivity and accelerate growth at wound care and sports medicine. Less supply chain friction should also release working capital and boost modest cash flow conversion rates.
All of these factors underpin Mr Nath’s targets for 2023 and then over the medium term, which are more ambitious than those set before, at least when it comes to the top line.
For this year, the goal is to increase sales by 5pc to 6pc and boost the operating margin by a fraction, to at least 17.5pc from 17.3pc in 2022 (although still a marked discount to US comparators, it must be noted). Further out, the plan is to drive sales up at least 5pc a year and the trading margin to at least 20pc by 2025.
The good news is the balance sheet is sound. A net debt pile of £2bn may sound a lot but it is not an undue burden when set against shareholders’ funds of £4.4bn, for a gearing ratio of less than 50pc, and when operating earnings and interest income cover interest expense by nearly six times, as they did in 2022.
That means lenders are not applying any pressure and Mr Nath and colleagues can focus and get down to work. If they do reach those medium-term goals, then earnings per share could nudge above $0.80 or 66p at current exchange rates, on a statutory basis.
That is not far away from prior historic peaks of $0.88 and would leave the shares on 18 times earnings. Admittedly that is no screaming bargain relative to the FTSE 100, but it would represent a big discount to the US medical equipment peers such as Stryker.
Questor says: hold
Ticker: SN
Share price at close: £11.86
Update: Hunting
A bid for Wood Group from US private equity firm Apollo could be seen to support this column’s thesis on oil services and equipment firm Hunting, even if there are clear differences in business models, strategy and financial structure between the two firms.
Wood has rejected Apollo’s bid of 230p a share which implied an all-in purchase price, including debt, of some £2bn and a forward multiple of something like six times earnings before interest, tax, depreciation and amortisation.
Hunting trades at a slight discount to that, assuming consensus forecasts are in the right area of both companies, but it is even more telling that private equity is now stalking an industry that may be seeing increased spending by its big oil and gas customers after a long period of austerity.
Hunting’s full-year results are due out tomorrow.
Questor says: hold
Ticker: HTG
Share price at close: 330p
Russ Mould is investment director at AJ Bell, the stockbroker
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