Smith & Nephew — Challenges being addressed

Smith & Nephew — Challenges being addressed

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.

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Written by

Smith & Nephew

Challenges being addressed

Healthcare equipment & services

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12 February 2018

Price

1,228p

Market cap

£11bn

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Share details

Code

SN

Listing

LSE

Shares in issue

875m

Business description

Smith & Nephew is a leading UK-based maker of medical devices. It is the world's number one in arthroscopy products; two in advanced wound management; three in trauma and extremities products; and number four in orthopaedic reconstruction products.

Bull

Strength in attractive market niches, such as orthopaedics, endoscopy and wound care.

Recent acquisitions have been strategically sensible, alongside divestment of its gynaecology business, from which shareholders benefitted via a share buyback.

The biggest European medical device maker, which the specialist and popular press have mentioned as an M&A target.

Bear

Growth continues to be modulated by FX, a larger manufacturing base than competitors and economic conditions in various markets.

Consolidation of hospital buying patterns plays in favour of even bigger medical device companies.

Product pricing is likely to stay challenging, as healthcare funding remains under pressure.

Analysts

Dr Andy Smith

+44 (0)20 3077 5738

Alice Nettleton

+44 (0)20 3077 5734

Smith & Nephew is a client of Edison Investment Research Limited

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.

Emerging markets justify their billing

Full-year 2017 reported revenues of $4.77bn were up a reported 2% compared to FY16, driven by continued strength in knee implants. Emerging markets retained their prime billing with an underlying 12% revenue growth for the full year. China, S&N’s largest emerging market, demonstrated double-digit revenue growth, and the oil price-related revenue deferral weakness in the Gulf states of 2016 now seems to have been resolved. There was a $326m one-off benefit that helped EPS of 94.5c beat analysts’ consensus estimates.

FY18 guidance builds on 2017

Back in Q317, S&N guided that FY profits would be towards the lower end of its previously announced range. Having now hit that, investors should have confidence in the FY18 guidance of 3-4% underlying revenue growth, an improvement in trading profit margin of between 30bp and 70bp, and a tax rate of between 20% and 21% (from c 25%). The 3% underlying growth in revenues for 2017 was mirrored by a similar growth in trading profit further down the income statement. This suggests the potential for cost savings from scale and synergies from the broad-ranging APEX programme. It is hoped that APEX will result in $160m annual by 2022.

Valuation: Between its bigger US peers

S&N currently trades at 17.6x FY18 P/E, between its US peers Stryker (21.2x) and Zimmer (c 14.9x), but S&N offers investors emerging market growth at a level (16% of S&N’s global revenue) much higher than its US competitors. It is worth noting that in these volatile times, S&N, unlike GlaxoSmithKline and AstraZeneca, offers investors FTSE100 life science cash generation in 2017 after dividends, rather than consuming cash.

Consensus estimates

Year
end

Revenue
($m)

PBT
($m)

EPSA*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

4,691

959

82.8

30.8

20.5

1.8

12/17

4,765

996

90.8

35.0

18.7

2.1

12/18e

5,060

1,084

96.3

36.2

17.6

2.1

12/19e

5,269

1,152

103.4

39.6

16.4

2.3

Source: Smith & Nephew, Bloomberg. Note: *Before amortisation of intangibles.

Disclaimer

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Smith & Nephew and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney, NSW 2000,

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney, NSW 2000,

Australia

Disclaimer

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Smith & Nephew and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2017]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney, NSW 2000,

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney, NSW 2000,

Australia

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