Smith & Nephew PLC’s (LON:SN.) results were broadly in line with forecasts but analysts raised concerns about 2020 guidance and coronavirus implications, as China contributed more than half of group organic growth last year.
The FTSE 100 group’s full-year numbers showed fourth-quarter organic growth of 5.6%, well ahead of the consensus forecast of 4.5%.
READ: Smith & Nephew's 2019 revenue growth at the top end of the range
This was driven by a strong performance from the knees and hip implants of the Orthopaedics division and even stronger from Sports medicine, which includes joint repair and technologies to enable arthroscopic surgery, while wound care remained weak.
The company said it expects 2020 organic revenue growth of 3.5-4.5%, with analysts having expected guidance of around 4.2%, with guidance given for trading profit margins to be “flat or slightly above” last year.
Perhaps the key element was that coronavirus has “introduced additional uncertainty”, with management’s 2020 outlook “assumes the situation normalises early in the second quarter”.
Analysts at UBS expected the reaction to be neutral to positive, saying, “Results were broadly in line however we believe there was some concern going in to the numbers on 2020 margin guide and coronavirus implications”.
Over at JPMorgan Cazenove, analysts noted that circa 7% of revenues were generated in China last year and that the emerging markets segment, of which China contributed more than a third, grew 16.1% in 2019, accounting for more than half of group organic growth.
“With many elective procedures currently suspended in China, this could be a sizeable headwind in Q1,” the Caz analysts said.
“If this resolves quickly, we would expect most of the Q1 shortfall to be caught up in the rest of the year (we think this is the assumption in the guidance as well). The near term downside risk…is that either China remains challenged for longer, or COVID-19 spreads more widely.”
Shore Capital’s analysts said that the consensus forecast, currently near the top of end of revenue guidance, “may need to slightly reduce its margin expectations”.
But on a longer-term view, the ShoreCap number crunchers said they continue to like the company’s new commercial model.
However, their view is that growth will take priority over margin expansion “and so are not surprised” to see an outlook for flattish profit margins as S&N needs to invest in its business on both the R&D and marketing fronts.
“We still believe S&N may have to undertake large scale M&A to achieve consistent, above market growth rates and highlight the associated difficulties of elevated valuations and a competitive acquisition space,” they added.
The current year will see more investment in R&D, the commercial team and emerging markets, as well as for the acquisition of new technologies, ShoreCap added, saying their view would be more positive if new chief executive Roland Diggelmann makes bolt-on acquisitions his strategic priority.