Smith & Nephew counts costs of cancelled operations

During the Covid-19 crisis, few will have paused to shed a tear for the woes of any FTSE 100 constituents, unless, of course, they hold shares in them. But the past year has been dire for the likes of medical equipment provider Smith & Nephew (SN.), which is counting its losses as hospitals cancel routine operations to deal with the pandemic.

The disruptions are reflected in an 11 per cent fall in full-year sales, while the operating margin fell to 6.5 per cent from 15.9 per cent a year earlier. The group’s knee and hip replacement, sports medicine and ear-nose-and-throat product lines have all felt the pinch as health providers pushed non-urgent surgeries down the waiting list.

The fall in elective operations has been substantial. As the Investors’ Chronicle recently revealed, the number of these procedures performed by NHS trusts between March and November almost halved year-on-year. Researchers have estimated 28m operations worldwide were cancelled during the first 12-week peak of disruption alone.

Operating theatres started to welcome more patients through their doors following the first wave of coronavirus last spring – Smith & Nephew said the slowdown in the fourth quarter of 2020 was less severe as healthcare systems adapted. But Covid-19 cases have since peaked again, forcing surgeons once more to pause routine procedures. Experts have suggested operations will not return to normal levels until 2022, with hospitals likely to keep beds free for lingering coronavirus patients and a resurgence of the flu once lockdowns are lifted.

It will be a bumpy recovery for Smith & Nephew, which is hoping to return to growth this year. Unsure of the incoming demand for their products, surgical equipment suppliers are faced with a dilemma over optimal inventory levels, so Smith & Nephew was forced to increase provisions by 22 per cent year-on-year to $377m. 

Following an investor revolt over executive pay in 2019, Smith & Nephew has maintained its dividend and plunged more money into research and development, as it looks to emerge stronger after the pandemic.

Tragically, a number of people have also passed away while waiting to receive treatment during the pandemic – which translates into irrecoverable revenue for the likes of Smith & Nephew. But ultimately, the group can expect to regain much of the income lost (delayed) so far. Those who needed a hip replacement in 2020 will still need it in 2022. So, with the shares down by a fifth over the past 12-montns, and various vaccination programmes in full swing, now might be an opportune moment to buy into a stock which stands to benefit from a significant demand backlog. Buy.

Last IC view: Hold, 1,566p, 29 Jul 2020