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Why exporter Smith & Nephew is not a big Brexit winner

It has not been plain sailing for the wound-care company, with lower sales in China and currency movements weighing on profitability
August 2, 2016

Medical equipment giant Smith & Nephew (SN.) looked like a winner in the post-referendum currency turbulence. Given that it reports in dollars and generates 50 per cent of its revenue in the US, it was treated by investors as a solid bet in the face of the falling pound. However, with its costs also denominated in dollars, trading profit margins have been knocked by 170 basis points to 20.8 per cent. The overall negative effect on these numbers from currency swings triggered enough investor disappointment to send the share price down 6 per cent on the day.

IC TIP: Hold at 1245p

Profit was also restrained by integration costs following the acquisitions made last year, but new businesses have started contributing to the top line, with the 1 per cent revenue boost helping to offset the currency drag. Organic revenue growth was largely driven by a strong performance at the sports medicine joint repair segment, where underlying turnover was up by a tenth.

Geographically, the US and other established markets (including Australia, Canada and Europe) continued to perform strongly, with underlying revenue growth of 6 per cent and 2 per cent, respectively. But problems in China have been exacerbated in the past 12 months as destocking by distributors caused a further decline in sales.

Broker JPMorgan has downgraded forecasts off the back of these results and now expects full-year adjusted earnings per share of 83ȼ, down from 85ȼ in 2015.

SMITH & NEPHEW (SN.)

ORD PRICE:1,245pMARKET VALUE:£11.2bn
TOUCH:1245-1246p12-MONTH HIGH / LOW:1,324p1,041p
DIVIDEND YIELD:1.9%PE RATIO:41
NET ASSET VALUE:441ȼ*NET DEBT:43%

Half-year to 2 JulTurnover ($bn)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ)
20152.274113311.8
20162.333272712.3
% change+3-20-18+4

Ex-div: 6 Oct

Payment: 25 Oct

*Includes intangible assets of $3.76bn, or 420ȼ a share £1=$1.32