New management to reinvigorate Smith & Nephew, says Morgan Stanley
By Michele Maatouk
Date: Monday 10 Dec 2018
(Sharecast News) - Morgan Stanley upped its stance on Smith & Nephew to 'overweight' from 'equalweight' on Monday, lifting the target price to 1,692p from 1,457p as it argued that new management should help to reinvigorate the top line performance following years of stagnation.
It noted that the shares have been rangebound for the last 18 months and said this reflects a lacklustre earnings performance - including a profit warning early this year - and uncertainty surrounding the CEO change.
"The appointment of a new CEO, Namal Nawana, who has an extensive background in medical devices, provides a helpful platform to address the below-market growth in many of its divisions," said MS.
"In our view, the executive committee changes, leaner management structure and new divisional presidents appointed since the CEO began bode well for an improvement in performance."
MS said it expects the maker of artificial hips and knees to see accelerating organic sales growth and margin leverage opportunities through 2019, while the stock is trading on a 10-year low EV/EBITDA versus the orthopaedics peer group.
The bank said it had raised its organic sales growth assumptions marginally for FY19E and FY20E to reflect its growing conviction that core weakness in several underperforming divisions is being systematically addressed by the new CEO and his recent appointments.
"We see the investment case consisting of: 1] Accelerating organic sales growth in underperforming categories; 2] Operational leverage driving up margins; 3] Valuation on 10-year lows of -20% relative to the peer group; and 4] Balance sheet optionality not in our forecasts," it said.
At 1329 GMT, the shares were up 0.6% to 1,484.50p.
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