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Smith & Nephew PLC 23 June 2008

Update Report – 1Q 08 Results

Robust sales growth on account of higher sales from the Reconstruction segment

ADR HOLD Fundamental research indicates a 6% upside in the ADR over the next 6–24 months. We have
calculated the target price based on fundamental factors, using a weighted average of target prices
Fundamental stock
obtained using DCF and comparative valuation methodologies.
Ticker: SNN
Target price: US$60.47
Current price: US$56.90 We reiterate the ADR (1 ADR = 5 UK shares) a HOLD with a 6–24 month target price of US$60.47 per
share.

UK stock HOLD The UK stock is expected to depreciate by 7% over the next 6–24 months as the 6% fundamental
upside is offset by 13 percentage point’s downside attributable to the anticipated depreciation of the
US dollar against sterling over our investment horizon.
Ticker: SN.L
Target price: GBp537.51
Current price: GBp574.50 We reiterate the UK stock a HOLD with a 6–24 month target price of GBp537.51.

Supervisor: Ashish Khetan

Analyst: Raghvendra Pathak Investment horizon - short term actionable trading strategies
Editor: Adil Bahar, PhD This report addresses the needs of strategic investors with a long term investment horizon of 6-24 months. If
Global research director: this report is provided to you by your broker under the Global Settlement, you may now also access (free of
Satish Betadpur, CFA charge) the short term trading outlook that we publish from time to time for this issuer, looking at the coming
5-30 days for readers with a shorter trading horizon. These are available on-line only at
www.researchoracle.com.
Next news due:
2Q 08 results, 7 August 2008
Report summary
Smith & Nephew PLC (SNN), a leading manufacturer of knee and shoulder implants, experienced a
robust top-line growth in 1Q 08, primarily driven by higher revenues from the Orthopaedic
Reconstruction segment, which was further augmented by moderate growth in all business segments
in 1Q 08. The segmental performance was supported by more product launches and increase in
market share of new products. Smith & Nephew is constantly trying to strengthen its product offering
by launching improved products and pricing them according to the market competition. We are
optimistic about the company’s efforts of portfolio improvisation, which will support top-line growth,
going forward. However, we believe the above mentioned positives are partially offset by our concern
regarding the impact of harmonizing sales practices of Plus orthopaedic holding AG (Plus) and rising
competition for the company’s key products such as the BHR system. In addition, we are cautious
about the impact of EIP (Earning Improvement Program) on the bottom-line in near term.
Consequently, our outlook for the company remains unchanged. Furthermore, we believe the stock is
fairly valued at the current market price. Therefore, we reiterate SNN’s ADR a HOLD over our
investment horizon.

Currency impact on the UK stock

By itself, the impact of the anticipated currency movements on the UK stock (now GBp575.50),
without considering changes in the share price, is negative and is expected to be:

Over 6 months: GBp598.95

Over 12 months: GBp517.27
Over 24 months: GBp505.78

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