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Smith & Nephew - revenue rises as procedures pick up

First quarter underlying revenue rose 5.9% to $1.3bn ignoring the impact of exchange rates...

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First quarter underlying revenue rose 5.9% to $1.3bn ignoring the impact of exchange rates. This reflected growth across all segments, with Sports Management & ENT and Advanced Wound Management leading the way.

The group continues to expect underlying revenue growth of 4-5% for the full year, with growth weighted toward the second half. Full year profit margins are still expected to grow by 0.5%.

Shares were up 2.4% following the announcement.

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

Our view

As a medical device maker for elective procedures, Smith & Nephew has a lot of growth potential on the horizon.

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.

Things are starting to normalise and that's helped revenue in all three divisions grow. In particular, there's significant opportunity in the group's Sports Medicine and Orthopaedics businesses. Both were hit by delays from the pandemic.

What's more, Smith & Nephew is 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% and expected to expand further. 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 2.3% prospective dividend yield, the market isn't overly excited. That's reflected with the group's P/E ratio of 17.6, slightly below the long-term average.

The backlog of elective surgeries postponed in 2020 are starting to hit the market. As long as the macroeconomic backdrop doesn't deter potential patients Smith & Nephew, with its new leaner cost base and relatively strong balance sheet, is in a solid position to capitalise. If all goes well and the group can execute on its cost saving initiatives, shares have the potential to rerate, though as always there are no guarantees.

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.

First Quarter Results (underlying)

A recovery in elective surgery volumes meant Established Markets revenue rose 4.1% to $1.1bn while double-digit growth in India, the Middle East and Africa and Latin America helped Emerging Markets revenue rise 14.3% to $243m.

Revenue in the Orthopaedics division rose 2.6% to $541m. This reflected a strong recovery in elective surgery volumes which led to a 12.2% increase in Knee Implants. This offset declines across the rest of the segment.

Sports Medicine & Ear Nose and Throat (ENT) benefited from double digit growth in Sports Medicine Joint Repair and Ear, Nose and Throat as knee repairs and tonsil and adenoid procedures picked up following a lull during covid. This offset a 0.8% decline in Arthroscopic Enabling Technologies. Total revenue for the division rose 8.6% to $396m.

Growth across the board Advanced Wound Management meant revenue rose 8% to $369m.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 28th April 2022