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Smith & Nephew slips as ShoreCap starts coverage with ‘sell’ rating, thinks valuation looks stretched

“Our analysis leaves us comfortable that S&N has a sufficiently competitive portfolio in Orthopaedics (Reconstruction and Sports Medicine), with recent under-performance more likely reflective of weak commercial execution”

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However, the analysts said they are less positive on Smith & Nephew’s Wound business, where they see commoditised markets facing negative pricing

ShoreCap has started coverage of Smith & Nephew PLC (LON:SN.) with a ‘sell’ rating as its thinks the medical products firm’s valuation look stretched with the group in the midst of a cultural and operational transformation led by new CEO Namal Nawana.

In a note to clients, the City broker’s analysts said early evidence of the transformation is encouraging with the FTSE 100-listed company reporting a return to market growth in the first quarter of 2019 on a group level.

READ: Smith & Nephew increasingly confident underlying revenue growth to be in upper half of guidance

They added: “Our analysis leaves us comfortable that S&N has a sufficiently competitive portfolio in Orthopaedics (Reconstruction and Sports Medicine), with recent under-performance more likely reflective of weak commercial execution.”

However, the analysts said they are less positive on Smith & Nephew’s Wound business, where they see commoditised markets facing negative pricing as being less attractive.

They continued: “We see potential upside from the ongoing APEX cost savings programme and ample opportunity from SG&A in the near-term.

“However, we believe that sustainable growth, both on the top and bottom line, will take time and while the recent improvements and changes to the commercial structure are supportive, it is still relatively early.”

Furthermore, the analysts said they see M&A as an over-hang for the group in the near-term, with the new management team demonstrating an increased appetite for large-scale M&A, supported by a healthy balance sheet, but the market weary of stretched valuations.

They concluded: “In the context of recent performance (+17% YTD vs the FTSE AllShare +8%) we see the current valuation at 21x forward earnings for modest growth versus peers as stretched.“

In morning trade on Monday, shares in Smith & Nephew were 0.2% lower at 1,690p.

Quick facts: Smith & Nephew PLC

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