Smith & Nephew’s ratings affirmed by Moody’s with positive outlook

Moody’s Ratings has affirmed Smith & Nephew plc’s Baa2 long-term issuer ratings and revised the outlook to positive from stable, driven by solid organic revenue and margin growth, a rebound in free cash flow generation to pre-pandemic levels, and a conservative financial policy. The rating action reflects the UK-based medical products manufacturer's strong market position and expectations for continued improvements in profitability and leverage, with Moody's projecting gross leverage around 2.3x in 2025 and 2.2x in 2026, supported by excellent liquidity and robust free cash flow generation. This improved credit profile enhances the company's financial flexibility and signals potential for future rating upgrades.

Analysis

Moody's has affirmed Smith & Nephew's (SNN) Baa2 long-term issuer rating and upgraded its outlook to positive from stable, signaling strengthening credit fundamentals. This revision is underpinned by the successful execution of the company's transformation plan, which has driven solid organic revenue growth and a 100 basis point expansion in its H1 2025 trading profit margin to 17.7%. Financial flexibility has materially improved, with free cash flow generation rebounding to pre-pandemic levels, reaching $419 million for the last twelve months to June 28, 2025, due to better profitability and inventory management. The company maintains a conservative financial policy with a net leverage target of approximately 2.0x, a figure Moody's projects will be closely approached with adjusted gross leverage falling to 2.2x by 2026. SNN's liquidity is deemed excellent, supported by $691 million in cash and a $1.0 billion undrawn credit facility, providing significant capacity for the expected increase in bolt-on acquisitions. The positive outlook is further supported by projections of continued improvements in profitability and robust free cash flow after dividends, estimated at around $400 million in 2025 and $500 million in 2026, positioning the company for a potential rating upgrade.

Key Decisions for Investors

• The positive credit outlook from Moody's de-risks the investment profile for Smith & Nephew (SNN), suggesting improved financial stability and potentially lower future borrowing costs, which is a fundamental positive for equity valuation.
• Investors should note the company's enhanced capacity for capital allocation, as strong free cash flow generation and excellent liquidity can support both value-accretive bolt-on acquisitions and shareholder returns.
• Monitor progress on key metrics that could trigger a credit rating upgrade, specifically the ability to maintain adjusted gross debt/EBITDA sustainably below 2.5x and deliver continuous EBITDA margin expansion.