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Q2 sales soar at Smith & Nephew

The group’s revenues were badly hit by the postponement of elective procedures last year
Q2 sales soar at Smith & Nephew
  • The FTSE 100 constituent delivered an improvement in operating profits in the first half
  • The dividend has been maintained, albeit the future trajectory of the pandemic is impossible to predict

As Covid-19 took hold last spring, hospitals around the world redirected their resources to the front line of the pandemic, postponing non-essential procedures. But the easing of virus restrictions has since allowed elective surgeries to begin to return, providing a much-needed shot in the arm for medical device group Smith & Nephew (SN.).

Second-quarter revenues soared by almost a half to £1.3bn, the FTSE 100 constituent said on results day, though such growth was aided by a particularly weak comparator. Looking back on the same quarter two years ago, revenues were down 1 per cent on an underlying basis.

Still, Smith noted that a strong performance in orthopaedics (up 43.3 per cent underlying) and its other two franchises reflected not only the softening of Covid rules but also “decisions… to maintain investment in our sales force, new product development and launches”.

Even with such investment, Smith reported operating profits of £239m for the six months ending 3 July, up from losses of £5m in last year’s first half.

The group has kept the guidance issued in its Q1 trading update, targeting underlying sales growth this year of between 10 per cent and 13 per cent. It expects the trading profit margin to sit between 18 per cent and 19 per cent – with both projections assuming that surgeries aren’t limited in number by Covid in the second half. That assumption must be weighed with scrutiny by investors.

SMITH & NEPHEW (SN.)   
ORD PRICE:1,471pMARKET VALUE:£ 12.9bn
TOUCH:1,470-1,471p12-MONTH HIGH:1,682pLOW: 1,317p
DIVIDEND YIELD:0.3%PE RATIO:32
NET ASSET VALUE:607ȼ*NET DEBT**:41%
Half-year to 3 JulTurnover ($m)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ)
20202.0-34.011.514.4
20212.622323.414.4
% change+48-+103-
Ex-div:30 Sep   
Payment:27 Oct   

*Includes intangible assets of $4.5bn or 511ȼ a share

£1 = $1.39

actset consensus estimates put EPS at 88ȼ for 2021, up from 65ȼ in 2020 – giving a forward price/earnings multiple of 23 times. Further underpinning the suggestion of a sustained recovery, management has maintained Smith’s interim dividend at 14.4¢ apiece. Buy.

Last IC view: Buy, 1,492p, 18 Feb 2021