Smith & Nephew is a prime example of a business that always seems to be battling headwinds, is never quite firing on all four cylinders, but over the long term still makes very respectable progress. Product setbacks, adverse currency moves — there is always a problem to give investors a small twinge of anxiety.
Even so, as the chart demonstrates, the medical products group has over ten years produced a 182 per cent capital gain — 12 times greater than the average for the FTSE 100.
Completion yesterday of the sale of its gynaecological division to its American rival Medtronics for $350 million is a good moment to take stock, especially as S&N has also fired the starting pistol on a $300 million share buyback.
It’s not the most exciting use of spare cash, but Olivier Bohuon is unlikely to be hamstrung if he spots a suitable acquisition. He has struck 20 deals since becoming chief executive in 2011 and he interrupted a previous buyback plan in 2013 to give him firepower for his biggest acquisition, the $1.5 billion purchase of ArthroCare.
That helped to propel S&N into the big time in sports medicine. As usual shareholders are being asked to be patient after a pretty nondescript first half, in which underlying trading profit declined by 3 per cent.
The disposal of the gyno unit was a good example of how a breakthrough in one discipline can have benefits for another. But ultimately S&N did not want to spread itself too thin.
De-stocking by the Chinese has been a problem among emerging markets clients, while customers in the Gulf have been uncharacteristically thrifty in the face of lower oil prices. But S&N’s strategy of chasing emerging markets business is always going to produce local setbacks. Strip out China and emerging markets revenue growth is strong.
Meanwhile, housekeeping standards are high. Bohuon has so far achieved $110 million of annualised cost savings, out of $120 million originally envisaged.
For the full year, S&N looks on course for sales of $4.7 billion and net profits of $574 million. On yesterday’s closing share price of 1265p, it is on a price/earnings multiple of 19 and yields a prospective 1.8 per cent.
That’s not cheap, but for all the setbacks, S&N tends to confound the doubters. And if it doesn’t, the bid speculation that periodically hangs around the shares and has dissipated recently will return.
My advice Buy
Why Good market positions and strong acquisition record
LMS Capital
It’s decision time for shareholders in this private equity investment trust. The board has come up with a surprising new proposal, which is to abandon its longstanding liquidation plan, appoint an external fund management house and have another go at picking winners.
There’s nothing necessarily wrong with any of this. The proposed external manager, Gresham Trust, is solid, while as LMS gets ever smaller its overheads and wind-up costs become disproportionately large. But it certainly wasn’t the proposal five years ago, when the company decided to liquidate all assets, and pass the proceeds back to investors.
There has already been one attempt to row back on that promise last July. A bizarre plan to hire Tony Hayward, the former boss of BP, and go into the global energy business was abandoned after a month with no explanation. Like the latest wheeze, that was also floated in the summer, with many investors away.
Investors who just want their cash back are understandably riled. They can’t just sell in the market because the shares trade at a yawning discount to net assets.
LMS is sweetening the pill with a tender offer to repurchase 7.7 per cent of its shares at a 5 per cent discount to net asset value. It is also dangling two further possible tender offers. But aggrieved investors say that the most they can extract in cash will be 28 per cent of their remaining holdings.
Investors who want their money back as soon as possible should vote against the key Rule 9 waiver resolution next week.
My advice Vote against
Why Cash sooner, as promised
Telit Communications
Telit is a punt on the Internet of Things. Its software and hardware keep cooking oil suppliers up to speed with the deep-fat fryers in fast food restaurants and tell floor-cleaning machinery suppliers when their brushes need to be replaced.
Revenues grew 6.3 per cent in the six months to the end of June to $166 million, while adjusted after-tax profit was down 18 per cent to $11.4 million. Progress was slowed by the disruptive transition from 3G to 4G in the US.
But the company is bullish for the full year. Telit’s chief executive, Oozi Cats, is predicting an annual sales growth rate of 20 per cent in America and 11 to 17 per cent globally. That would deliver ebitda profits of about $52 million, up from $45 million in 2015.
There are risks galore. This is technology after all. Sentiment hasn’t been improved by Telit’s habit of capitalising part of its research and development spending, nor by its missed forecasts in the past. Telit says its customers are sticky and claims a 30 per cent market share in the machine-to-machine space.
Berenberg has the company on a price/earnings ratio of 14.9 times, while the prospective full-year yield is 2.1 per cent.
My advice Buy
Why Inexpensive given pacy growth prospects
And finally...
More honking at eSure, the car insurer, which disappointed investors on Friday with a 30 per cent cut in the interim dividend. Shore Capital called the policy “bewildering” and predicted a similar reduction in final dividends for this year and next. The price-earnings ratio at 15 times was “too rich”, given that 62 per cent of profits came from low-quality ancillary income. Esure’s website GoCompare was inferior to its rival MoneySupermarket, it said, recommending that investors sell. The shares rose 2.6p to 271.1p.
