UBS cuts Smith & Nephew rating on margin expansion concerns

Smith & Nephew shares plunged on Thursday after UBS downgraded the company to ‘neutral’ on concerns about margin expansion.

The investment bank said in a note that it has previously rated the company at ‘buy’ on the opportunity for margin expansion driven by a recovery in the Wound business.

“However given (a) slower than expected growth in that division in H2 2015 and (b) 2016 guidance which implies little or no underlying margin expansion beyond known effects, we do not have sufficient confidence in the opportunity to maintain a 'buy' rating.”

UBS also said management commentary suggesting that the tax rate is unlikely to decline further beyond 2016 removes one of the key EPS growth drivers of recent years.

It also noted that the key uncertainty facing investors in the impact of the reimbursement charge.

“From the first of April 2016 the way that Medicare pays for hip & knee replacements for up to 1/3rd of their beneficiaries will change.

“This could result in increased price pressure from surgeons, who are (for the first time) allowed to be paid for finding cost savings.”

But UBS did say it saw a positive catalyst in first quarter results.

“There are three more trading days in Q1 2016 than in Q1 2015, providing a 5% tailwind to growth rates.

“Whilst brokers have factored this impact into their quarterly phasing in the past we believe this could provide a tailwind to investor sentiment in the near term.”

UBS also cut its target price on Smith & Nephew from 1,250p to 1,100p.

Shares in the company were down 18p (1.67%) to 1,063p at 1132 GMT.