S&N keeps things nice and dull

THE INVESTMENT COLUMN

No one would pretend there is anything very exciting about Smith & Nephew's product portfolio, where reasonably well-known brands such as Elastoplast and Lil-lets are joined by stomach-turners like leg-ulcer bandages and plain boring pieces such as tongs to help the infirm pick things up off the floor.

There was little to get excited about, either, in yesterday's interim pre-tax profit figure, which showed an underlying 4 per cent rise to pounds 85.3m. That was before the pounds 148m exceptional item that blew a hole in last year's figures, as the company faced up to the disastrous cost of its investment in Ioptex, the US lens business.

Earnings per share, at 5.23p, were up by a similarly uninspiring margin and the dividend, 2.16p, was increased by 7 per cent, reflecting the underlying growth of the business.

But at the end of a summer that has been punctuated by unexpected profit warnings and gloomy trading statements, there is something eminently reassuring about a company growing steadily, nudging its market shares ever higher, and predicting more of the same for the foreseeable future.

And being dull does not stop the company being an extremely attractive bid target when it occupies first or second place in so many markets and has enormous clout with big buyers both in the UK and overseas, where 80 per cent of Smith's sales are now made.

The company poured water yesterday on the latest resurgence of the rumour that Johnson & Johnson is poised to buy it, but it is easy to see why the American giant might be interested.

Smith & Nephew's markets are undoubtedly mature - 2 per cent growth in volume and perhaps 1 per cent a year in price is a fair guess - so pushing turnover and profits ahead by a steady 8 per cent a year is not bad.

That is especially so when some of Smith & Nephew's more important markets, such as France and Spain, are as flat as a pancake. To achieve that sort of growth, managers have done much hard and unglamorous work, selling lower-margin operations and buying small niche-market leaders, spending a reasonably high proportion of sales on research to keep the new ideas flowing, and stripping out the fat from the company's European distribution system.

Whether that good work and bid speculation are enough to merit a p/e premium to the rest of the market of about 20 per cent, however, is far from clear. On the basis of forecast profits of pounds 181m this year, the shares, down 5p to 190p, trade on a p/e of 17 . That is too high given the dull growth prospects.

HSBC had to look better

Dismal results have their uses - a year later they can make any performance look pretty spectacular. That was certainly the case with the 250 per cent leap in dealing profits reported yesterday by HSBC, due in no small measure to 1994's well-below-par performance.

The turnround helped bolster a satisfactory set of headline figures for HSBC, which reported interim pre-tax profits up 19 per cent to pounds 1.7bn - a solid performance. The figures are rather flattering, however, and behind the dealing gains and the benefits from disposals and low provisions lurks plenty to give investors pause for thought.

Much of the strong earnings is coming from HSBC's peripheral regions - the Americas and continental Europe - while the core businesses in the UK (Midland Bank) and Asia are not doing as perkily as the headline numbers suggest.

If you strip out the gains from disposals and lower bad-debt provisions, Midland's normal banking operations in the UK have seen a fall in earnings in the region of 15 to 20 per cent. The huge dealing profits from around the world have also been credited to London and Midland, putting a much healthier glow than justified on the underlying performance.

With provisions now as low as they can possibly get, and dealing profits and disposals higher than normal, it is worth asking quite where the conventional banking business is heading from here.

The results in Hong Kong also appear worryingly pedestrian, and the future is full of risks. This makes trying to pass a judgement on HSBC more an act of faith than a reasoned assessment of the underlying business. If you believe that Hong Kong is a viable, continuing entity, and that HSBC's management will manage to do more with Midland than has been achieved so far, then HSBC's shares are not expensive on a prospective p/e of under 10.

Nor should they be, however, with growth expected to fizzle out next year and a prospective yield of 4.6 per cent underpinning the shares but providing little incentive to buy.

Budget cuts

squeeze Takare

Britain's ageing population and the Conservatives' privatisation initiatives gave nursing-home stocks such as Takare, the biggest in the sector, go-go status in the late 1980s and early 1990s. But Takare's shares have suffered since the 1993 Community Care Act passed responsibility for the elderly to local authorities, whose budgets are increasingly stretched.

Yesterday's half-time report to June showed that average occupancy levels, down from 96.5 to 95.8 per cent, are continuing to suffer, with no sign of the post-April pick-up as councils start a new financial year. There is also a growing geographical disparity in authorities' ability to cope. It is unfortunate that two apparently having difficulty, in Essex and Hertfordshire, are in parts of the south-east region being targeted by Takare.

That said, the company has shown commendable sensitivity to investors' worries by moving to depreciate land and buildings and cutting down on the practice of capitalising interest, lopping pounds 1.69m from interim pre- tax profits, up from pounds 9.39m to pounds 9.97m, and leaving earnings per share almost static at 6.5p.

Takare remains confident it can finance its pounds 55m-pounds 65m annual capital expenditure programme from its own resources - fears of a cash call have been another cause of shareholder jitters. Gearing has risen from 2 to 23 per cent since June last year.

Profits of pounds 25.5m this year would put the shares, up 3.5p at 191p, on a prospective multiple of under 14. Reasonable value, although Takare is exposed to Government financial stringency given that 86 per cent of its residents depend on state funding.

COMPANY RESULTS

Turnover pounds P/Tax pounds EPS Dividend

Argos (I) 474.7m(412.8m) 21.8m (15.3m) 4.82p (3.37p) 4p (2.65p)

Firstbus Group (F) 44.3m (-) 24.8m (-) 8.2p (-) - (-)

Flextech (I) 15.2m (8.6m) -7.4m (-9m) -7.88p (-9.03p) - (-)

HSBC Holdings (I) 2.45bn (2.24bn) 1.74bn (1.45bn) 46.11p (36.68p) 9.25p (8p)

Midland Bank -(-) 527m (443m) 39.6p (34.6p) - (-)

Microvitec 26.55m (20.9m) 1.6m (1.1m) 1.47p (1.24p) 0.4p (-)

Smith & Nephew 480.7m (457.4m) 73.1m (-65.8m) 3.84p (-8.61p) 2.16p (2.02p)

Takare 51.5m (42.5) 10m (9.4m) 6.5p (6.4p) 0.9p (0.8p)

(Q) - Quarterly (F) - Final (I) - Interim

PROMOTED VIDEO
News
Bryan Cranston as Walter White, in the acclaimed series 'Breaking Bad'
news
News
Those who were encouraged to walk in a happy manner remembered less negative words
science
Sport
footballChelsea 6 Maribor 0: Blues warm up for Premier League showdown with stroll in Champions League - but Mourinho is short of strikers
Arts and Entertainment
Princess Olga in 'You Can't Get the Staff'
tvReview: The anachronistic aristocrats, it seemed, were just happy to have some attention
News
Renee Zellweger as Bridget Jones
i100
Life and Style
tech

Board creates magnetic field to achieve lift

News
ebooksAn unforgettable anthology of contemporary reportage
News
There have been various incidents of social media users inadvertently flouting the law
news

Life and Style
Stack ‘em high?: quantity doesn’t always trump quality, as Friends of the Earth can testify
techThe proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
News
Bourgogne wine maker Laboure-Roi vice president Thibault Garin (L) offers the company's 2013 Beaujolais Nouveau wine to the guest in the wine spa at the Hakone Yunessun spa resort facilities in Hakone town, Kanagawa prefecture, some 100-kilometre west of Tokyo
i100
Sport
CSKA Moscow celebrate after equalising with a late penalty
footballCSKA Moscow 2 Manchester City 2: Premier League champions let two goal lead slip in Russia
Environment
Sudan, the last male northern white rhino
environmentThe death of a white northern rhino in Kenya has left the species with a single male. These are the other species on the brink
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Senior Helpdesk Analyst / Service Desk Co-ordinator

£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...

Senior Pensions Administrator

£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Corporate Actions Administrator / Operations Administrator

£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells