Convatec
While technology stocks allow investors to buy into a hopeful glimpse of the future, Convatec offers a more humdrum view of humanity in the next few decades: people are getting older, and more bits of them are going wrong.
The company makes a range of products that we hope to never need, including colostomy kits, wound dressings and devices to help chronic diseases such as diabetes and Parkinson’s. Convatec sells one in five ostomy bags around the world.
By 2050, the number of people aged over 60 is set to rise to almost 2.1 billion. Obesity levels are also rising, particularly in the US, Convatec’s biggest market, meaning diabetes treatments are becoming a core part of caring for older people.
Convatec’s private equity owners, Nordic Capital and Avista, sold a stock market listing last October. It was the biggest to brave the febrile climate for UK equities following the EU referendum, and was rewarded with a spot in the FTSE 100.
The firm said in its IPO prospectus that demand for its treatments should grow between 3 and 6 per cent a year for the rest of the decade.
Demographics might be pulling in its favour, but the target of 4 per cent organic revenue growth also depends on its suppliers, regulators and customers all pulling in the same direction. It disappointed some investors in August when half-year results were weighed down by supply delays, taking profits down 7 per cent. House broker Peel Hunt said the firm was capable of making up the shortfall at the back end of the year, but other analysts were sceptical. The shares were down from a peak of 344p to 270¼p on Tuesday.
Management, led by Paul Moraviec, has made several acquisitions since the IPO. allowed it to repay old debts. EuroTec, a Dutch stoma care specialist, was added to in January, followed six months later by Woodbury, which delivers catheter supplies direct to patients’ homes. Expanding into home-care products places Convatec in a position to benefit as the richest nations shift treatment out of hospitals.
This move lessens its dependence on big institutional clients. In 2015, sales infusion devices to the largest customer made up half the total sales for that franchise, and 8 per cent of total group sales. Changes to healthcare policies or supply needs in one country, or even within just one client, could have a major effect.
The business is now broad enough to have 9,000 employees in 100 countries. This comes with the risk that a far-flung subsidiary will indulge in the sort of misconduct that left Convatec facing sanctions from the World Bank in Bangladesh in 2015. The firm has tightened up its policies on payments by sales staff.
All this expansion needs to fit into the “margin improvement programme”, which aims to add 3 points to the current gross margin of around 60 per cent, despite headwinds from the strong US dollar Convatec uses for its accounts.
Tempus recommended buying at 295p in May, after the firm’s maiden results showed that it could stick to its growth guidance even with pricing pressure in Europe. Since then the stock has surged and then fallen to below this level.
The shares are trading at almost 20 times this year’s forecasted earnings, roughly comparable to larger rival Smith & Nephew, but at a discount to others including Coloplast and Aim-listed Advanced Medical Solutions. At the next update on November 7, investors should get an idea whether Convatec can catch up with its full year targets.
With a dividend pledge of 35 to 45 per cent of adjusted net income, the shares still offer value —more so for those willing to wait for the world’s population to age another few years.
MY ADVICE Buy
WHY Long-term health trends still work in its favour, despite sales blip
AG BARR
Three main themes dominate half-year numbers from the Scottish soft drinks maker AG Barr — the weather, sugar and costs — and the resultant cocktail is pleasingly sweet.
It delivered an increase in sales of 8.8 per cent to £136.6 million, impressive in the context of a UK soft drinks market up 4.2 per cent over the same period, while pre-tax profit before exceptionals rose by 2.9 per cent to £17.5 million.
Growth was achieved across both carbonated and still drinks although operating margins went backwards, down from 13.9 per cent to 13.2 per cent, thanks to higher input costs resulting from the weak pound.
For the six months to July 29 the impact of the decent weather on Barr was broadly positive. The poor weather that has dogged the second half has had the opposite effect, although the company still expects to hit full-year guidance.
The group is adopting a two-pronged strategy ahead of the proposed sugar tax in April next year. It is launching new products and reformulating existing ones to reduce sugar content, so that by January at least 90 per cent of its brands will contain less than 5g of sugar per 100ml. Even Scotland’s favourite fizzy drink has not escaped and, in January, Irn-Bru itself will be relaunched with a halved sugar content of just below 5g.
The group is in a strong financial position, with net cash of £7.9 million. Its strong balance sheet has enabled it to pay an increased dividend and embark on a £30 million share buyback, although Roger White, the chief executive, was adamant that would not prevent it from pursuing any M&A opportunities that arose. So adamant, that it is hard not to draw the conclusion that he has at least one juicy target in his sites.
Its last deal, Funkin, which was bought in 2015, has traded well. Revenues for the cocktail mixer brand jumped by 31 per cent in the first half amid increasing cocktail consumption, and the recent payment of a deferred £4.5 million earnout on the deal is a sign of how well the brand is performing.
AG Barr’s shareholders would doubtless have no hesitation in backing further such deals.
MY ADVICE Hold
WHY Market is challenging but management is adept at running a tight ship
