Morning Note: Market news and an update from Smith & Nephew

Market News

Traders are preparing for a heavy slate of central bank decisions this week, including one where the Federal Reserve is widely expected to cut interest rates. 10-year Treasuries yield 4.15%.

In Asia this morning, equity markets were mixed: Nikkei 225 (+0.2%); Hang Seng (-1.2%); Shanghai Composite (+0.5%). China was boosted by some government proposals that may spur inflows into the stock market as well as better-than-estimated export data which pushed the trade surplus past $1 trillion for the first time.

The FTSE 100 is currently little changed at 9,664. Unilever’s ice cream business, The Magnum Ice Cream Co., has started trading in Amsterdam and London. Sterling trades at $1.3325 and €1.1430. Japanese purchases of UK Gilts hit their highest level since 2021 in October. The 10-year yield has crept back up to 4.52%.

Donald Trump warned Netflix’s planned acquisition of Warner Bros Discovery may pose anti-trust concerns and the combined entity’s market share “could be a problem”.

Europe faces a “real problem” as slow bureaucracy drives out business and innovation, Jamie Dimon said. That weakness, he said, poses a major risk to the US, which should be helping the continent become stronger. President Macron has called for a rethink on the ECB’s approach to monetary policy.

Silver wavered near a record and gold climbed to $4,210 an ounce. Copper continued its recent rally, while Brent Crude held at $63.50 a barrel.

Source: Bloomberg

Company News

Smith & Nephew has announced a new strategy, which builds on its existing plan, with financial targets set for 2028. The company has also updated its guidance for 2025, with margins expected to be in the top half of its target range and free cash flow ahead of previous guidance. The plans will be fleshed out at an event in London this afternoon, followed by a more detailed presentation on the group’s innovative portfolio at an event in New York tomorrow. In response, the shares have been marked up by 2% in early trading.

Smith & Nephew (S&N) is a medical products company with three specialist global franchises: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management.

We believe the group is well placed to benefit from the increased incidence of obesity and related conditions, such as diabetes and osteoarthritis, given its strong market position in joint replacement, trauma and diabetic ulcer treatment. Meanwhile, the shift to more active lifestyles in some quarters is expected to lead to increased wear and tear on joints and more sporting injuries, a trend which should benefit S&N. Finally, the group should benefit from an ageing population, who consume more medical products and are more prone to chronic diseases, and growth in emerging markets, as a growing middle class look to access higher-quality healthcare and adopt ‘western’ lifestyles and habits.

However, over the last few years, the business has been impacted by the continued delay to elective surgeries, supply chain issues, higher input inflation, and the impact on pricing of volume-based procurement (VBP) in China. There is also a concern over the impact GLP1 weight loss drugs will have on the industry which we believe is overdone.

In addition, operational execution at S&N has been mixed over the medium term with recurring restructuring charges and under-performance relative to its global rivals. In response, in 2022 the company set out a 12-Point Strategy for Growth Plan focused on fixing Orthopaedics, improving productivity, and accelerating growth in Advanced Wound Management and Sports Medicine & ENT.

As a result, Smith & Nephew is a now fundamentally stronger business than three years ago.

With today’s announcement, the company has updated its 2025 full-year guidance, with trading profit margin guidance now expected to be at least 19.5% (versus a range 19%-20% previously) and expected free cash flow upgraded from around $750m to around $800m. The company still expects underlying revenue growth to be around 5%.

This morning the company has set out a new strategy (RISE), which builds on the existing 12-point plan and will deliver new levels of financial and operational performance to drive shareholder value. The plan has four elements:

·       To Reach more patients by driving adoption of the group’s differentiated portfolio and taking share across indications, settings, and markets worldwide.

·       To Innovate to enhance the standard of care through accelerating new product launches and rapidly scaling existing innovation platforms.

·       To Scale through strategic investment, allocating capital to high return and high growth opportunities aligned to the group’s portfolio priorities.

·       To Execute efficiently, driving enterprise productivity and asset efficiency to expand margins and returns.

Sports Medicine, Advanced Wound Management, and ENT will drive above-market growth through innovation and disciplined execution, while Orthopaedics, operating in a more mature segment, will return to delivering market-level growth, supporting margin expansion, and enhanced returns.

Overall, the new plan is expected to deliver a further step-change in financial performance between 2025 and 2028. The aim is to deliver:

·       6%-7% underlying revenue compound annual growth rate (CAGR), significantly above the group historical average.

·       9%-10% trading profit CAGR, built on operating leverage and efficiencies.

·       More than $1bn in free cash flow in 2028.

·       12%-13% post-tax ROIC in 2028, significantly above the group’s Weighted Average Cost of Capital, creating significant value for shareholders.

The company has also identified further opportunities to rationalise its product portfolio. Work is ongoing to finalise the product families and individual Stock Keeping Units (SKUs) which will be removed from the portfolio over time, but the company currently estimates it will be able to reduce gross inventory by around $500m. To achieve this significant and ongoing reduction in the capital requirements of the business, the company will take an estimated $200m non-cash inventory provision in 2025.

The company has also issued provisional guidance for 2026 which will be confirmed at the time of the 2025 results in March. Underlying revenue growth is expected to accelerate to around 6%, with profit growth expected to be ahead of revenue growth as operating leverage is delivered. Free cash flow is expected to be around $800m, with a post-tax ROIC expected to exceed 10%.

There is no update on the group’s financial position or shareholder returns. As a reminder, the company has a robust balance sheet and access to significant liquidity. In the first half, net debt stayed at around $2.4bn, with gearing of 1.8x net debt to EBITDA, versus the 2.0x target. The dividend was raised by 4.2% to 15c. As a reflection of strong cash generation, the group recently completed a $500m share buyback programme.

Source: Bloomberg