Bottom Line: S&N manages to stay healthy

SCEPTICS looking for signs of margin pressure at Smith & Nephew in the price-conscious healthcare environment have been disappointed yet again by the group's half-year figures.

Operating margins increased from 16.5 to 17.1 per cent. Pricing pressure applies to less than 20 per cent of S&N's sales and cost-cutting not only offset the impact of this but enhanced the effect of price increases roughly in line with inflation elsewhere.

Excluding the eye-boggling pounds 148m exceptional loss on the sale of Ioptex, its ill-fated intraocular lens business in the US, pre-tax profits rose by 12 per cent to pounds 82.2m or by an underlying 8 per cent after adjusting for a reclassification of convertible preference share dividends.

The dividend is up by 7 per cent, in line with the growth in underlying earnings.

Sales growth in S&N's higher- margin products in wound management, casting and support, and trauma and arthroscopy is bowling along at over 10 per cent. Growth in orthopaedic implants, where buyers are more able to defer purchases, slowed to 8 per cent, depressed by poor conditions in Spain and France. Commodity products like surgical gloves are in retreat but consumer healthcare grew 10 per cent, helped by the relaunch of the Simple toiletries brand.

Strong cash generation has reduced gearing to 4 per cent and leaves the company able to contemplate a variety of horizontal acquisitions. Margins may not have much further to rise, so earnings are likely to follow underlying sales growth of 7 per cent. At this stage of the cycle a p/e of 14.5, assuming pre-tax profits of pounds 180m and a yield of 4.2 per cent at 154.5p, looks fair value but no more than that.