We had the opportunity to join Smith & Nephew’s (S&N) recent institutional investor roadshow and hear about the introspection that has emerged following the appointment of its new CEO. While endorsing its strategy as a portfolio medical device company, two strategic reviews have identified areas which, when the detail is announced at the Q3 and FY18 results, will enable investors to track S&N’s target of returning to market growth rates.
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Smith & Nephew |
Turning over that new leaf
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Healthcare equipment & services |
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28 September 2018 |
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We had the opportunity to join Smith & Nephew’s (S&N) recent institutional investor roadshow and hear about the introspection that has emerged following the appointment of its new CEO. While endorsing its strategy as a portfolio medical device company, two strategic reviews have identified areas which, when the detail is announced at the Q3 and FY18 results, will enable investors to track S&N’s target of returning to market growth rates.
The situation
S&N is Europe’s largest medical device company with three divisions that can be further divided into nine franchises and many more product areas. Such a complex organisation operating in c 100 countries has evolved into an unwieldly structure, which had constrained underlying growth to c 2% in Q2 – below the market rate of c 4%. Strategic reviews have benchmarked S&N against its higher-performing peers, which are organised along franchise rather than geographic lines, and examined the organisation from the bottom up. Two areas of focus have been highlighted (in addition to M&A) that should return S&N to higher growth.
It is not the products
In each of its three main business segments and product franchises, S&N has developed products that are best-in-class in terms of their advanced technology and clinical outcomes. Two cases in point are the POLAR3 hip replacement, which has a 99% device survival rate after seven years, and the PICO negative pressure wound therapy product, which NICE has assessed as showing better efficacy that the standard of care. The POLAR3 construct is part of the hip franchise and PICO part of its advanced wound care division, whose segment sales are c 13% and 4% of total sales, respectively.
Targeted corrective action
Two reviews have suggested that S&N’s complex, fragmented commercialisation and reporting structures could be the factors that mute its growth to below faster-growing peers. The broad APEX cost-saving programme, and now the streamlining of the commercial organisation, increase the role of the S&N specialist in a more customer-centric approach.
Valuation: Room to improve
S&N trades at 19.5x FY18e earnings, which is between its peers, Stryker (24.1x) and Zimmer (16.9x), although S&N has the highest emerging market exposure.
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Consensus estimates
Source: Bloomberg |
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Disclaimer
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Disclaimer
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Research: Industrials
Diskus Werke has accompanied predictably solid H1 results (PBT up 5%) with lowered 2018 PBT guidance, now expected to be up 3% at €14m, suggesting a flat H2. While half-yearly divisional performance is not disclosed, this shortfall is attributed mainly to the expected turnaround of longstanding loss-making subsidiaries rather than core demand (June 2018 order book up 15% y-o-y with H1 book/bill ratio of 1.09 vs 0.95 y-o-y). Finances remain sound (debt/equity ratio 51%) despite much higher net debt, driven by working capital needs and continued strong investment.