To call Smith & Nephew (S&N) a work in progress is an understatement. It used to be known for Elastoplast, Lil-Lets and Nivea cream, but they were sold 22 years ago in a strategic decision to exit the consumer market and make advanced medical devices.
The group has become a wide-ranging medical equipment and treatment maker. Bandages have turned into advanced wound management, as part of a portfolio that takes in sports medicine, orthopaedic reconstruction and the sobering traumas and extremities.
But, in opting out of competition with Procter & Gamble and Johnson & Johnson for the consumer pound and dollar, the group has taken itself into a world every bit as competitive, with the added headache of selling to the toughest customers: state-owned health providers.
This column rated the shares a hold in April last year at £15.31, when investors were looking forward to S&N meeting pent-up demand for elective surgery. But they fell to £10.38 as that opportunity became mired in unexpected problems, not least supply blockages stemming from lockdowns in China. Deepak Nath, the chief executive, said at this year’s half-year results that “in terms of execution, we’ve become more complex and less agile than our larger peers”. For the six months to July 2, he reported a £362 million profit against £378 million the year before, as rising cost inflation, principally freight and logistics, outstripped the ability to raise prices. Revenues were flat at £2.1 billion.
In a rare mea culpa from a chief executive, Nath said: “We are in an uncertain environment with unprecedented macro factors. We’ve got high levels of inventory, we’ve got product in the wrong places. We haven’t been good. We haven’t ensured that we’re matching our supply and availability to customer needs.”
Although it is refreshing to hear a company’s problems being laid out so clearly, it amounts to a formidable to-do list that would-be shareholders should ponder carefully.
The successful Sports and Wound divisions show that S&N can exploit its advantages, and these two businesses pull in 60 per cent of total revenue. But orthopaedics was also held back by China supply holdups, a key challenge. It is unsettling that Nath did not at first understand why, and had to look into the problem.
One weakness was being slow to develop a cementless knee, hopefully longer-lasting because they fuse with bone, but that has been resolved. Hopes are pinned on Cori (Core of Real Intelligence) robotic surgery, and it may be the first company to offer robotic-assisted knee ops.
But the management problems go deeper than that, in terms of the ways S&N operates, such as aligning supply with demand and managing capital efficiently. Full Instrument sets were going to places that did not need them, and there were not enough sets elsewhere.
“It’s not a linear kind of path from here to 2024,” according to Nath. “The fixes that we’re putting in place, I expect to pay off in non-linear ways once we get the wiring right, get the commercial and operation teams working as they should, and put the processes in place.” That is, however, likely to be reflected in a “non-linear path” for the shares too.
Despite the problems, Columbia Threadneedle’s Chris Kinder, who holds the shares in his CT UK Extended Alpha fund, says S&N has good long-term prospects. It has identified the problems, a first step to solving them, and if there are no more unforeseeable calamities, then it should make solid progress.
A 5 per cent growth in earnings per share for 2022 would produce 84.9 cents and an undemanding 12.25 p/e ratio. The dividend will probably be unchanged at 37.5 cents, a 3.6 per cent yield. However, there is the possibility that, at this point of vulnerability, a predator could try a takeover once this year’s results are out and before Nath’s ambitions come to fruition. It could be a tricky time in the boardroom.
ADVICE Hold
WHY It is working through its problems, but still has some way to go before the risks subside sufficiently to buy
Moneysupermarket
Dame Judi Dench’s choice of Moneysupermarket for her first television advert testifies to the price comparison firm’s growing status. She plays the mastermind behind the Money Super Seven team, representing the group’s seven advice channels: broadband, energy, credit cards, travel, home, car and pet insurance.
Tipped here in February at 185p, the shares rose to 225p in July, and slid to 188p as the government has effectively taken over the energy market. That setback is temporary and unlikely to be repeated in its other channels. But it will impact this year’s results, and possibly 2023’s. We will hear more in a third-quarter bulletin on October 18. Otherwise, the fundamentals are sound, with the technology to supply an increasingly sophisticated market that generates 12 million inquiries a year.
The pandemic froze holiday insurance calls for two years but, as travel returned, Moneysupermarket was again flooded with requests. In the first half of this year, revenue rose 19 per cent to £193.2 million, taking adjusted Ebitda 10 per cent higher to £56.6 million. Earnings per share grew from 6.1p to 7p. Operating cash flow was £45.9 million against £35.1 million for the same period last year.
Peter Duffy, the chief executive, said: “We’ve performed well with strong profit growth despite some mixed end-markets. At the same time we’re making strategic progress towards becoming a flexible tech-led savings platform, with all our core data now in Google Cloud Platform.”
Recent purchases of Ice Travel and the cashback site Quidco, show that Duffy is in the mood for new opportunities. But he is staying in the UK: different regulations in every new territory are a big deterrent.
Shore Capital last week saw 253p as fair value for the shares. A 15.2 p/e ratio on expected 2022 profits, and a 5.8 per cent dividend yield, are firm underpinnings.
ADVICE Buy
WHY Group can consolidate its market leadership
