Smith & Nephew eyes more M&A after strong finish to year
Smith & Nephew launched five new strategic "imperatives" for the medium-term, including a greater focus on dealmaking, after the orthopaedic and wound-care specialist enjoyed a solid finish to 2018.
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After fourth-quarter sales growth of 3% on an underlying basis, full-year revenues increased 2% to $4.9bn and trading profit 7% to $1.1bn. Underlying and trading figures excluded a 1% foreign exchange impact, while trading profit margin benefitted from a one-off legal settlement.
The fourth quarter completed an improving trend over the year, with revenue growth up 1% in the first half and 3% in the second, with 3% underlying revenue growth in both the third and fourth quarters.
Reconstructive implants products contributed good growth from both knee and hip implants, while sports medicine and trauma and wounds were held back by continued softness in Arthroscopic Enabling and Advanced Wound Bioactives.
By region, emerging markets delivered strong underlying growth, with China growth in double-digits, and US growth solid, but other established markets in reverse.
Adjusted earnings per share rose 6.8% to 100.9 cents, ahead of the average analyst forecast for 94.5 cents. Allied to $1.1bn of cash generated from operations, a final dividend of 22.0 cents per share was recommended, giving a total payout of 36.0 cents, up 3% year on year.
Namal Nawana, who became chief executive last May, said a new operating model had been put in place from 1 January, with a specialist president now sitting atop each of the three global marketing franchises - Orthopaedics, Sports Medicine/ENT and Wound. "We start 2019 with a strengthened organisation and a new growth-oriented operating model," he said.
In terms of top-line figures, 2019 revenue is expected to increase 2.5-3.5% underlying and trading profit margin is expected at 22.8-23.2%, a 40-80bps underlying improvement.
Nawana's five strategic imperatives are to "achieve the full potential of the portfolio" to accelerate organic revenue growth; acquiring and developing leading "enabling technologies" to transform procedures, including robotics, imaging and augmented reality; accelerating portfolio growth in high-growth segments through M&A and partnering; developing a "winning culture" to improve retention and attract talent; and expand margins by "operations transformation and organisation simplification".
SN shares rose 2.5% in early trading on Thursday to 1,498.5p.
Broker Shore Capital noted that revenue was largely in-line with consensus expectations and adjusted EPS was ahead, while 2019 guidance for reported revenue growth of 1.8-2.8% compares to consensus of around 2%, while trading profit margin guidance of 22.8-23.2% is ahead of consensus sitting at circa 22.6%.
Analyst Adam Barker said the new commercial structure to try and drive organic growth came after the group had delivered a revenue CAGR of circa 2.5% in the last few years against its markets growing at nearer 4%.
"As such, the success of its portfolio will depend on the competitive profile of key, individual products in our view (which we believe looks strong) and how effective the new commercial structure is at promoting those products," he said.
M&A seems to be a focus of the new strategic shift, he added, with plenty of balance sheet capacity, having been "fairly inactive in M&A relative to its peers".
"This is particularly important in MedTech where short development cycles mean that M&A is often required to retain the most innovative on-market products. We note that competitors such as Stryker are also likely to be fairly active in M&A and has recently reiterated its belief that it sees M&A as a 'core competence'."