It is easy to overlook the fact that Smith & Nephew is rather more dependent on general economic trends in the countries where it operates than others in the healthcare sector. This accounts for its sometimes erratic progress. In the past, hard times in the United States and elsewhere have led to patients delaying non-urgent operations on hips and knees, hitting sales of its replacement joints.
Last year S&N was hit by two unrelated economic circumstances beyond its control. Low oil prices meant that hospitals in the Gulf states were putting the brakes on existing contracts to deliver its products, particularly trauma and wound management. These deliveries will have to come back at some stage as the shelves are empty, but there is as yet no sign.
In China, the company’s model involves selling through distributors. These had been stocking up a couple of years ago, leading to growth rates of 20 per cent or more. When the economy there slowed down, they decided to run down their stocks. The good news is that this market is beginning to come back again, with double-digit growth set to return.
Olivier Bohuon, chief executive, reckons those two factors knocked more than 1 per cent off revenues last year. Fourth quarter revenues were down by 1 per cent across the group on an underlying basis, but there is a complicating factor: four fewer trading days than last time. Take this out and growth was running at 3 per cent, an improvement on the year as whole.
Mr Bohuon has carried out about 20 acquisitions since taking the helm six years ago, including two large ones, Healthpoint and Arthrocare, which lessened its dependence in those reconstruction hip and knee treatments and expanded into wound care and sports medicine. Last year it bought Blue Belt Technologies, which provides robots to carry out reconstruction work and is growing revenues at more than 50 per cent a year.
Despite a $300 million share buyback programme S&N has the headroom to carry out further acquisitions, while $120 million of cost savings measures are in place. The shares, off 3p at £11.98 after company forecasts for 2017 suggested consensus estimates for the year were too high, sell on 17 times earnings. No obvious reason to buy.
MY ADVICE Avoid
WHY The company has successfuly diversifed away from the core hips and knees business, but the multiple appears to reflect prospects
Pennon Group
Water companies make dull, reliable investments because of their regulated earnings stream, which is why retail investors like them. Severn Trent had a reassuring trading update at the end of last month for the third quarter. United Utilities is not even going to issue one. The third remaining quoted company, Pennon, owner of South West Water, has been the most interesting and not always for the right reasons.
A third of the company is Viridor, a waste management business that has been the subject of profit warnings in the past, mainly because of the low price in the market of the recycled materials it produces. These seem to be behind it and the 12 energy recovery facilities across the UK are providing growth that is not available to its two peers.
Pennon confirmed yesterday that South West Water is on track to repeat last year’s return on its regulated assets of 11.7 per cent this financial year. This is the highest in the sector but it is Viridor that allows the best dividend yield of the three. Pennon is pledged to pay inflation plus 4 per cent; the yield on the shares, up 28½p at 845p, is an attractive 4.2 per cent.
MY ADVICE Hold
WHY The dividend yield is slightly higher than its peers’
RPC Group
Some are entitled to wonder if RPC is in danger of over-stretching itself. The latest acquisition comes less than two months after the previous two, an entry into southern Africa and the €262.5 million purchase of ESE World, which makes wheelie bins among other things. Last year RPC also agreed the takeover of the quoted British Polythene Industries.
The company’s record of bedding in those earlier purchases and getting better-than-expected efficiencies and cost savings from them is better than almost anyone’s. It is paying up to £511 million for Letica, a US packaging group that will double the proportion of revenues from North America to 18 per cent. Some wonder about the 8.5 times earnings RPC is paying, ahead of earlier deals, but this drops to 6.4 times if cost savings, identified and prospective, are factored in and if the full earn-out materialises.
The shares dropped 61p to 998p, reflecting the hefty one for four rights issue at a deeply discounted 665p. They are one of this column’s tips for this year and will certainly recover in due course as the benefits of the deal emerge. Letica is a family owned business where the latest generation no longer wish to remain; RPC reckons that there are plenty of such deals around — as well as those from private equity — and indeed has turned down three others since ESE was agreed.
This is a case where the management has to be trusted to get it right again. The shares sell on about 16 times the current price. That makes them good value still.
MY ADVICE Buy
WHY Investors should take the latest purchase on trust
And finally . . .
UK investors in Henderson Group, the asset manager, have a decision to make. In May the deal to acquire Janus Capital of the US is due to complete and Henderson will lose its London listing. Instead they will receive US paper in return for their shares. They have the choice of selling in the market for cash first, and this would normally be advisable. Dealing in US shares is easy enough, though, while the price is at a low ebb, at 213p a pound below its level in December. Investors might do better to hang on.
