Smith & Nephew dives as chief exits

Having overseen a near-doubling in the Smith & Nephew (SN.) share price during his seven year tenure, today’s profit downgrade is an unfortunate way for chief executive Olivier Bohuon to bow out at the medical devices company.

He’s successfully restructured the business, sharpened its focus and managed the development of some innovative products, not least the Navio robotic device being used to transform knee replacement surgery.

This operational progress has been made against the backdrop of near-constant takeover speculation, with the Hull-based firm most recently the reported subject of pressure from activist fund and investor Elliott to break itself up.

Importantly, Bohuon departs having extended the company’s proud record of paying dividends on its ordinary shares in each year since 1937. Its final dividend for 2017, which is due to be paid on Wednesday, was 16.24p, up from 14.42p the year before and the 6.70p in Bohuon’s first year in 2011.

The French CEO, who was previously at GlaxoSmithKline and US-based Abbott, will be replaced on Monday by Namal Nawana. The former Johnson & Johnson executive was most recently in charge of medical diagnostics company Alere.

Source: interactive investor        Past performance is not a guide to future performance

For Bohuon, his hopes of an upbeat farewell have been dashed by lacklustre market conditions, particularly in Europe. There was also a weaker performance in bioactives used for acute, chronic and burn-related wounds.

These are typically hard to heal wounds, including the large and increasing prevalence of diabetic ulcers. One of Bohuon’s first major deals as CEO was to buy US-based Healthpoint Biotherapeutics for $782 million in a bid to boost S&N’s exposure to this fast growing segment of advanced wound care.

Revenues in advanced wound management fell 2% on an underlying basis in the first quarter, while the knee and hip implants reconstruction division was flat. Sports medicine joint repair achieved the most success in the period, with underlying revenues growth of 6%.

Overall, S&N sales growth is now expected to be in the range of 2-3% for the full year, with a trading profit margin “at or above that achieved in 2017”. This compares with previous guidance for 3-4% revenues growth with profit margins up by 30-70bps.

UBS recently upgraded the stock from ‘neutral’ to ‘buy’ after examining the potential for S&N’s orthopaedic robot Navio, which it believes can help drive group revenues growth to 6% in 2020 from 3% in 2017.

Placing a new price target of 1550p on the stock, it said Navio was an opportunity largely being overlooked by consensus forecasts.

They wrote in April that 19% of respondents to UBS’s 200-strong surgeon Evidence Lab survey already used or plan to use Navio, despite only 8% using S&N implants most frequently at the moment.

UBS lifted EPS estimates by about 10% in 2020 due to the increased expectations for Navio. Its 1550p price target is equivalent to 22x 2018 PE.

HSBC recently upgraded its rating to buy and raised its price target to 1530p from 1320p. In contrast, Deutsche Bank cut its price target last month to 1309p.

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