ii view: bullish Smith & Nephew delivers healthy results

Full-year results to 31 December

• Adjusted revenue up 7.2% to $5.5 billion (£4.3 billion)
• Trading profit up 7.6% to $970 million (£766 million)
• Trading profit margin of 17.5%, up from 17.3% in 2022
• Final Dividend of 23.1 US cents
• Total full year 2023 dividend payment unchanged at 37.5 US cents per share
• Net debt including lease liabilities rose 10% to $2.8 billion

Guidance:

• Expects full year 2024 adjusted revenue growth of between 5% and 6%
• Trading profit margin expected to be at least 18%

Chief executive Deepak Nath said:

"I am pleased with our overall performance in 2023, as our actions to transform Smith & Nephew have begun to translate into meaningful financial outcomes. 

"We have entered 2024 as a fundamentally stronger business and look forward to delivering another year of robust growth and further margin expansion."

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ii round-up:

Medical equipment maker Smith & Nephew (LSE:SN.) today detailed annual sales growth better than its own prior estimates, led by demand for its Sports Medicine and Ear, Nose and Throat (ENT) business and including keyhole surgery products.

Full year 2023 adjusted revenues rose 7.2% to $5.5 billion (£4.3 billion), exceeding management forecasts for up to 7% growth and pushing adjusted or trading profit to $970 million versus $901 million in 2022. 

Shares in the FTSE 100 company rose 3% in UK trading having come into this latest news down by 6% over the last year. That’s worse than a 3% fall for the FTSE 100 index itself and in contrast with a 3% gain for US rival Zimmer Biomet Holdings Inc (NYSE:ZBH). 

Under relatively new head Deepak Nath, Smith & Nephew is pursuing a 12-point plan to improve efficiency and performance with the adjusted 2023 trading profit margin rising to 17.5% from 2022’s 17.3%. 

Smith & Nephew operates across the three divisions of Orthopaedics, selling replacement hip and knees, Advanced Wound care items, and Sports Medicine and ENT offering products to repair or remove soft tissue. 

A one-tenth increase in underlying ENT related product demand helped push revenues for the wider division up 9% to $1.7 billion. Adjusted Orthopaedics sales improved 5.7% to $2.2 billion, with Wound care demand climbing 6.4% to $1.6 billion. 

The Watford headquartered company’s 12-point plan focuses on fixing Orthopaedics to regain momentum, improving group wide productivity and further accelerating growth at the other two divisions. 

Accompanying management estimates for 2024 pointed towards adjusted sales growth of up to 6% with the trading profit margin forecast to improve further to 18%. 

Broker Morgan Stanley reiterated its ‘overweight’ stance post the results, flagging the company as a ‘top pick.’

ii view:

Started in Hull in 1856, this FTSE 100 company today employs around 19,000 people. The US generates its biggest slug of sales at just over a half, with other notable countries China at 5% and the UK almost 4%. In profit terms and over this latest year, Sports Medicine and ENT accounted for 37%, wound management 34% and Orthopaedics the balance of 29%.  

For investors, continued work in improving the performance of Orthopaedics persists. Previous attempts to kick start growth have proved mixed, costs for businesses generally remain elevated, while group net debt has increased and the dividend payment remained unchanged year-over-over. 

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More favourably, management’s transformation push continues. A focus on innovation has seen almost half its 2023 growth come from products launched in the last five years. Diversity in both products and geographical regions exists, while acquisitions have helped strengthen its business during the year. 

For now, and despite ongoing risks, an analyst consensus fair value estimate of £13 per share for this play on ageing demographics looks to give scope for longer-term optimism.

Positives: 

• Both product and geographical diversification
• Exposure to favourable demographics

Negatives:

• Elevated costs
• Subject to currency headwinds

The average rating of stock market analysts:

Buy