Investec upgrades Smith & Nephew, sees upside through break-up

28th Mar 2014 09:18

Investec has lifted its recommendation for Smith & Nephew from 'add' to 'buy' and hiked its target price by a third, saying that the medical equipment maker is "beginning to look like a growth stock again".The broker estimates an earnings per share compound annual growth rate of over 10% over the next three years and "believe[s] a re-rating is due".Investec lifted its target price from 832p to 1,100p.The broker said that even more value could be created at Smith & Nephew by breaking the group up. It has estimated a hypothetical fair value of 1,267p post break-up, 15% above the new target price."Smith & Nephew is a leader in most of its markets but growth rates have been low. Management has offset this by building the scale and geographical footprint of each area," Investec said."We now see key inflection points approaching that could provide the right environment for the group to be separated into three entities."Investec said that recent discussions it has had with Smith & Nephew management suggest that end-markets were tough for the group in the first quarter of 2014."While our view is based on the group's long-term outlook, we acknowledge the short-term risk, which may also provide an attractive opportunity for investors to increase holdings."The stock was up 2.5% at 922.5p by 10:09 on Friday.BC