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Smith & Nephew - revenue and profits up, CEO stepping down

Full year revenue rose 10.3% on an underlying basis, to $5.2bn. Revenue in Sports Medicine, Ear Nose & Throat and Wound Management is above...

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Full year revenue rose 10.3% on an underlying basis, to $5.2bn. Revenue in Sports Medicine, Ear Nose & Throat and Wound Management is above pre-pandemic levels. Trading profit, which strips out movements relating to acquisitions, restructuring and non-cash movements, rose to $936m from $683m, as the higher revenue and cost control offset increased logistics costs.

For the current financial year, the group expects underlying revenue growth of 4-5%, and continue to target 4-6% by 2024.

CEO Roland Diggelmann is stepping down after being appointed in 2019. He will be replaced by the ex-President of Siemens Healthineers Diagnostics business, Dr Deepak Nath, on 1 April.

A final dividend of 37.5 cents was announced, in line with the last two years.

The shares rose 4.0% following the announcement.

View the latest Smith & Nephew share price and how to deal

Our view

Smith & Nephew is a medical device maker, with a lot of growth potential following the tough conditions of the last couple of years.

The group operates through three segments - Orthopaedics, offering hip and knee replacements, Sports Medicine, a soft tissue repair business, and Wound Management, providing materials to manage injuries and prevent infection. All three were stifled by the pandemic as elective surgeries plummeted and long-term care facilities closed to new patients.

While Smith & Nephew's been struggling against supply chain headwinds, things are starting to normalise. In particular, there's significant opportunity in the group's Sports Medicine and Orthopaedics businesses. Both were hit by delays from the pandemic.

But demand hasn't gone away, operations have just been delayed - setting the stage for a very strong recovery. And Smith & Nephew will be meeting this wave of demand with a much more efficient business.

High fixed costs meant lower revenue last year weighed on profits. That pushed the group to embark on a restructuring effort designed to lower its overall cost base, optimising the manufacturing network and outsourcing warehousing and distribution. The project will cost around $350m, but save the group $200m per year by 2025.

This was part of the reason operating margins fell a long way away from their pre-pandemic levels of 16.9%. However, excluding restructuring costs and a handful of other one-off expenses, margins are now back at 18.0%. Keeping that target intact will be a key focus for incoming CEO, Dr. Deepak Nath.

If it weren't for supply chain issues and Omicron, Smith & Nephew would be rolling into 2022 with a budding recovery. But alas the group is expecting underlying margins to be a tepid 18-19%. Coupled with a modest 2.4% prospective dividend yield, the market isn't overly excited. That's reflected with the group's P/E ratio of 17.2, slightly below the long-term average.

If the pandemic continues to recede in 2022, the backlog of elective surgeries postponed in 2020 could flood the market. Smith & Nephew, with its new leaner cost base, is in a solid position to capitalise with a relatively strong balance sheet.

If things continue to normalise it means management has the flexibility to grow its existing portfolio and capture a larger slice of the market. But it also gives the group some breathing room if more Covid-related delays crop up.

Smith & Nephew key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full year results

Within Orthopaedics, underlying revenue rose 6.4% to $2.2bn, with growth across all product types - the biggest coming from Other Reconstruction, which includes robotics capital sales, joint navigation and bone cement. The biggest contributor to Orthopaedics, Knee Implants, saw revenue rise 5.1% to $876m. Compared to 2019, divisional revenue's down 8.3%.

In the final quarter of the year, the division was held back by Omicron and global supply chain challenges. Trading profit fell to $367m from $389m, largely reflecting higher costs.

Sports Medicine & Ear Nose and Throat (ENT), was buoyed by double digit growth across all products. As a result, divisional revenue rose 14.6% to $1.6bn. Performance was flat on 2019. Within ENT, performance is being helped by recovering volumes in adult procedures. Trading profit rose 50.0% to $459m.

It was a similar story at Advanced Wound Management, where revenue rose 11.8% to $1.5bn. Trading profit rose $158m to $474m.

Free cash flow, including acquisitions, was $184m. Net debt rose to $1.9bn from $1.7bn.

On 4 January 2021 the group completed the acquisition of the Extremity Orthopaedics business of Integra LifeSciences Holdings Corporation for $236m. On 18 January 2022 the group completed the acquisition of Engage Uni, LLC (doing business as Engage Surgical) for a provisional fair value of consideration of $132m.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 22nd February 2022