Investec has highlighted the strong end to the year seen at Smith & Nephew but has been forced to downgrade its rating for the stock with the expected total return (ETR) now under 10 per cent.

"Smith & Nephew has delivered a strong set of Q4's with EPSA [earnings per share (adjusted)] coming in almost 6.0% ahead of consensus expectations, driven by better than expected margins. The outlook is stable and we do not anticipate making any changes to our forecasts," the broker said on Thursday.

Investec said that the main reason for the beat was the trading margin, which increased by 10 basis points (bp) year-on-year in the fourth quarter, compared with its forecast for a 30bp decline - "a strong performance against what was a challenging comp".

The broker has raised its target price from 730p to 755p, but with the ETR now at 9.5%, its recommendation for the shares has been lowered from 'buy' to 'add'. [An ETR of over 10% implies a 'buy' rating]

While there was no mention of a cash return in the results, Investec said it sees scope for a cash return and the prospect of small upgrades providing support during 2013.

Shares were up 0.50% at 709p by 10:43 on Thursday.

BC

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