Smith & Nephew (LON:SN) reported slower revenue growth in H116 than management expectations, due principally to the trading problems experienced by the sector in the emerging markets, particularly China and the Middle East. The company indicates that this is improving, as China starts to return to growth (as seen in the Sports Medicine division in Q2), but we expect the weakness to continue through H2. Its 6% premium on 2016e P/E to the average of its global orthopaedic peers is supported by its leading position in innovative areas such as robotics, although to maintain this it needs to continue to innovate and improve its growth profile.
H116 driven by Sports Medicine and knee implants
S&N reported underlying sales growth of 3% in H1 (2% reported with a -2% FX effect and a 1% effect from acquisitions). The key divisions and geographic area drivers were Sports Medicine joint repair (+10%), knee implants (+7%) and the US (+6%). Results were particularly affected by difficult economic conditions in the emerging markets (a reported 4% underlying decline in sales), which had a particular impact on S&N’s Trauma division (-6% in Q2) and Advanced Wound Management (-7% in Q2). H2 will need to deliver stronger growth, which we expect to come from the Reconstruction and Sports Medicine divisions. In the emerging markets, there are indications of improvements (Sports Medicine returned to growth in China in Q2), although we expect continued weakness in H2.
To read the entire report Please click on the pdf File Below