Namal Nawana has been diagnosing the problems at Smith & Nephew since he became chief executive of the medical equipment maker last May.
The company has been limping along for some years, delivering underwhelming financial results and making it vulnerable to a break-up or takeover that threatened to bring to an end its 163 years of independence.
The company dates back to a pharmacy founded by Thomas James Smith in Hull in 1856 and expanded during the First World War when, under Horatio Nelson Smith, the founder’s nephew, it sold surgical and wound dressings. It has been a constituent of the FTSE 100 for almost two decades.
The business, which retains a research and development site in Hull, operates three franchises: sports medicine and trauma, advanced wound care management and reconstruction, namely knees and hips, which the company is perhaps best known for. It employs 16,000 people across more than 100 countries, with the United States by far its biggest market, accounting for almost half of group revenue.
The uncertainty around its future had only intensified with Mr Nawana, 48, replacing Olivier Bohuon last year. The change in the boardroom coincided with rumours that Elliott, the activist investor, had landed on its share register and Mr Nawana had overseen the sale of Alere, the last business he ran, to Abbott Laboratories, also of the US.
Mr Nawana is determined to revive and expand the business and his strategy has helped to dampen speculation. He has introduced a new operating model designed to improve management’s focus on products and yesterday’s full-year results suggested he has put the company on the “front foot”. Underlying revenue grew by 2 per cent to $4.9 billion in the year to the end of December and the profit margin increased 90 basis points to 22.9 per cent, which was in line with City forecasts.
The focus on sharpening its operational “execution” is showing positive signs, with underlying revenue growth accelerating to 3 per cent in the second half of its financial year, compared with 1 per cent in the first. Profit before tax fell to $781 million from $879 million, weakened by restructuring costs, and the full-year dividend was raised by 3 per cent to 36 cents per share.
The guidance for 2019 is also in line with expectations and an improvement on last year. Smith & Nephew is targeting 2.5 per cent to 3.5 per cent revenue growth and a trading profit margin of between 22.8 per cent and 23.2 per cent.
The wider industry is growing at 4 per cent, which is the target for Smith & Nephew to surpass. Boost ing its European business and its “arthroscopic enabling technologies”, tools used in procedures, is a priority.
Mr Nawana is not just working on improving organic growth. Having dealt with some of the operational and senior executive changes, attention is turning to potential mergers and acquisitions. It is looking at bolt-on deals, similar to the pre-Christmas acquisition of Ceterix Orthopaedics, a meniscal repair specialist, which Smith & Nephew plans to grow using its larger salesforce teams. Potential large takeovers are also being considered.
Its net debt to earnings before interest, tax, depreciation and amortisation is 0.8 times, but Smith & Nephew indicated yesterday that deals could take it towards 2 to 2.5 times and potentially beyond that. City analysts at Berenberg think that a ratio of 2.5 times could deliver $2.5 billion in firepower before any acquired earnings is accounted for and that equity deals remain an option. Depending on what deal Smith & Nephew lands, it could shrug off its limp and speed up growth.
ADVICE Hold
WHY Signs of operational improvements and capacity for mergers and acquisitions
Compass Group
Compass Group is a quiet overachiever. The world’s biggest caterer grows at a slow and steady rate of 4 to 6 per cent a year and has improved margins over the past few years, sealing its reputation as a robust performer, even in the face of economic uncertainty (Tabby Kinder writes).
This means that its shares have been on a steady incline and are highly rated, which has spelt avoid for Tempus in the past. In late 2015, the stock was trading at 19 times earnings at about £10.80 a share; now at close to £17.60, the shares trade at above 20 times earnings.
But analysts are bullish on its prospects and say that new business wins are likely as it is an undisputed market share winner in an increasingly outsourced market. It also has a good record of returning excess cash to shareholders with more returns expected on the horizon.
The catering market is about 50 per cent outsourced and that number is growing steadily. As most of Compass’s revenue comes from non-cyclical sectors such as defence, healthcare and education, there is every chance that it will weather future storms, prompting greater optimism. Analysts at Citi, the most optimistic in the pack, have set a target price for its shares of £19.
Compass’s first quarter of this financial year was characteristically strong, despite waning economic conditions in Europe, prompting an unusually effusive remark from Dominic Blakemore, its chief executive, who said it had been an “excellent start to the year”.
Revenues came in above expectations with a rise of 6.9 per cent, helped by its music and sporting events contracts and new orders from the UK armed forces. Its management is predicting a slight slowdown in growth for the rest of the year to about 5 per cent, but is known for erring on the side of caution, which is why the business typically beats its forecasts.
New investors are coming late to the story but, as the market leader with growth opportunities in its sector, it is likely to keep delivering for the foreseeable future. The shares rose 62p, or 3.7 per cent, to £17.58.
ADVICE Buy
WHY The shares are trading at a handsome multiple but with every expectation it should continue to deliver