Smith & Nephew has now completed the acquisition of a developer of knee cartilage regeneration in a deal worth up to $330 million.
The bolt-on purchase of CartiHeal, the developer of Agili-C, a sports medicine technology, was announced in November, but with the i’s dotted and t’s crossed, Scott Schaffner, Smith & Nephew’s president of sports medicine, vowed that the company’s “expertise in regenerative therapy and leadership in knee repair gives me great confidence that this will be a significant value creator” for Smith & Nephew.
Long-suffering investors in the veteran FTSE 100 company will hope that its bosses are right and that bolt-on acquisitions such as CartiHeal can help not only regenerate frail knees but also the company’s financial performance and limping share price.
Shares in the 168-year-old business are down by about a quarter over the past five years and by about 7 per cent over the past 12 months. The wider FTSE 100, meanwhile, is up about 11 per cent since 2019.
The company, based in Watford, Hertfordshire, is one of the world’s biggest medical equipment manufacturers and employs about 18,000 people in more than 100 countries making joint replacements, sports medicine and wound treatments.
Deepak Nath, a former president of the Siemens Healthineers diagnostics business, became Smith & Nephew’s third boss in quick succession when he took charge in April 2022. Nath, 51, is focused on fixing its problematic orthopaedics business, improving productivity and accelerating growth in its advanced wound management, sports medicine and ear, nose and throat franchises.
The company has shown signs of progress, with orthopaedics revenue rising by 8.3 per cent to $536 million in the three months to the end of September, which Nath, at the third-quarter results in November, called the best performance in years.
Yet the company continues to live up to a reputation for inconsistent trading updates. While it had forecast full-year underlying revenue growth towards the higher end of its 6 per cent to 7 per cent guidance range, it also had said that its trading profit margin — a closely watched performance measure in the City — was expected to be about 17.5 per cent because of headwinds in China. That compared with a previous forecast of at least 17.5 per cent.
The issues in China are thought partly to relate to Beijing’s anticorruption investigation in the healthcare sector. Last year Smith & Nephew noticed a slowdown in capital purchases and overall declines in the healthcare market, in procedures across the board, not merely in orthopaedics.
While Nath has said it is “anybody’s guess” how long the disruption in China will last, there is hope that the headwind will ease this year. An update is likely alongside the company’s full-year results, which are scheduled for February 27.
The situation in China, like the pandemic before it, has meant unfortunate problems for Smith & Nephew. The pandemic forced global healthcare systems to prioritise Covid patients, leading to a backlog of elective cases. The company then faced pressure on supply chains and inflation as economies reopened.
Nath has been focused on self-help measures, such as cutting overdue orders, launching new products and productivity improvements designed to generate more than $200 million of annual savings by 2025.
Meanwhile, the board also has been refreshed. Rupert Soames, 64, the newly appointed president of the CBI, replaced Roberto Quarta, 74, as the chairman in September. John Rogers, 52, the former finance boss of WPP and J Sainsbury, replaced Anne-Françoise Nesmes, also 52, as chief financial officer late last year before formally joining the board in the first quarter of this year.
The company hosted a “meet the management” event in late November as it sought to build investors’ confidence in its “12-point” plan.
The future success of Smith & Nephew is not only important to shareholders but also the wider national economy. The company is investing more than $100 million in a new research and development and manufacturing facility on the outskirts of Hull, East Yorkshire, where it was founded in 1856.
Advice: Buy
Why? New leadership is taking hold and an existing strategy is being implemented, while incoming M&A cannot be ruled out
Persimmon
Persimmon is one of the country’s biggest housebuilders (Tom Howard writes). Such were the woes in the property market that its output fell by a third in 2023, although it still managed to knock out close to 10,000 homes.
Historically, Persimmon has traded at a premium to its rivals, with investors happy to pay more for the company’s fatter margins, better returns and bigger payouts. But, in the eyes of the stock market, it has lost some of its appeal in recent years.
The shares still trade at a bit of a premium to the sector, but not as much. Margins have come under pressure and, at 14 per cent, are now more in line with the rest of the pack, a far cry from the 30.5 per cent operating profit margin boasted only six years ago.
On top of that, there is no commitment to return capital as it used to, a reflection of the balance sheet not being as strong as it once was. At the end of December, the company had £420 million of cash, half as much as it had 12 months earlier.
The expectation is that cash could fall again this year if Persimmon goes out looking for land to buy, which analysts suspect it needs to. The company’s landbank was once the envy of the industry, but arguably it was too cautious during the pandemic. Reflecting that, its site numbers have dwindled over the years: in 2017, it was working from 370 sites; last year work was under way at 266.
Analysts believe that Persimmon has the capacity to build 20,000 homes a year, which will be helpful when the long-awaited market recovery eventually arrives. Until then, this spare capacity acts as a brake on profit growth.
There remain positives for Persimmon, not least the improvement in the quality of its homes over the past five years and, after a tough 2023, this year is shaping up to be better for the housebuilders.
Persimmon expects to open between a net ten and twenty new sites this year, which will boost sales and margins should follow. Shares in the company are up 50 per cent since the end of October. If the anticipated rebound in the housing market plays out, they will likely head higher still, but there are surer bets in the sector.
Advice: Hold
Why? There are better-value plays in the housing market
