Smith & Nephew plc (SN.) Ordinary USD0.20

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Smith and Nephew’s underlying revenue was up 4.3% in the first half to $2.8bn as growth accelerated into the second quarter. There was a positive contribution from all territories and divisions.

Underlying operating profit increased by 12.8% to $471mn, driven by the improvement in revenue and efficiency gains.

Free cash flow was $39mn compared to an outflow of $82mn. Net debt including lease liabilities was $3.1bn.

Full year guidance was unchanged. Underlying revenue is expected to grow between 5-6%, with an operating margin of at least 18%, compared to 16.7% in the first half.

The company declared an interim dividend of 14.4¢, in line with the prior year.

The shares were up 6.4% following the announcement.

Our View

After a shaky start to the year, markets were pleased to see Smith & Nephew’s growth rates trending towards the target range at its interim results.

The medical device maker 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.

The Orthopaedics division has been something of a problem child for the group and it’s encouraging to now see growth consistently above historical levels. Operational improvements have had some success in overseas markets and there’s hope that can be replicated in the US.

An ageing population and as well as growing affluence in emerging markets are both tailwinds for growth in surgical procedures. But Smith & Nephew is not just sitting and waiting for the market to drive its sales growth. It's continuing to develop, acquire and launch new products, cross-sell its wide product range across its territories, and introduce existing products into new areas of treatment.

We see innovation as its biggest weapon for targeting higher market share. In Orthopaedics, new product lines and capabilities are being added to the CORI robotic surgery platform, where the group is seeing accelerated adoption by clinicians. Another area where the group is a thought leader is negative pressure wound therapy. Here, the Group’s products continue to evolve as management target a multi-year growth opportunity. Its regenerative therapies for sports injuries are also seeing strong sales momentum.

But while there are some structural growth opportunities, the group does face some challenges.

A change to the way China buys its medical devices has made for some tough reading. This continues to drag on growth in the Sports Medicine division and will remain a headwind for 2024 as a whole.

It's proving harder than expected to rebuild margins. Underlying operating margins of 16.7% in the first half were around the top end of guidance, but there’s still work to do to meet the full-year target of 18%.

That 18% target for 2024 is materially behind the original recovery plan, and there’s still a lot of work to do if Smith & Nephew is to reach the previously lowered target of at least 20% for 2025. This is reflected in the valuation which sits below the long-term average. Investors could be rewarded if Smith & Nephew makes good on its promises. But the market will need to see further evidence of improved productivity.

Market forecasts suggest a prospective yield of 2.8%, but as ever there can be no guarantees. And given the relatively high debt levels and drive for product innovation, there may be limited scope to increase payouts to shareholders.

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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