It didn’t take Convatec long to trip up after its much-vaunted flotation just under two years ago. Those investors that bought in at the 225p-a-share offer price will be sitting on a loss of an unlucky 13½p on their holding as of last night.
Those who bought in on the way to Convatec’s peak in June last year of 344p will be considerably further in the red. They shouldn’t have to fret about losing any more.
Convatec feels like a business with bundles of potential, a good deal of which it is failing to live up to. Founded in 1978 as a division of the American drugs group Bristol-Myers Squibb, it makes medical equipment such as colostomy bags and catheters, as well as dressings and creams for people with chronic wounds and other conditions.
Its main customers are national healthcare operators, including the NHS, as well as private hospital operators. It operates in more than 110 countries and employs about 9,500 staff.
It all started so well. When Convatec listed in October 2016, investors saw the growth potential for a company that is a market leader in many of its products and stands to benefit from the structural increase in the world’s older population and their higher tendency to suffer frailties. Its share price rocketed.
Then came the hiccups. Its private equity backers, Nordic Capital and Avista Capital Partners, cashed in at the float but then began to offload more of the holdings, unsettling some of the investors that were still in. In August last year, it reported an organic growth rate at the half-year stage that disappointed the market, and two months later downgraded its expectations for the full year.
The main culprit was Convatec’s relocation of a factory that made products for its advanced wound and ostomy care divisions from North Carolina to the Dominican Republic, which was intended to cut costs but led to supply problems and the loss of customers as a result.
Convatec had been targeting an annual organic growth rate of 2 per cent to 3 per cent, but cut it back to as little as 1 per cent. The shares were hammered, hitting a low of 182p in November and leading to its demotion from the FTSE 100.
In the end, Convatec increased its organic revenues by 2.3 per cent last year to almost $1.8 billion, going on to beat its target in the first quarter, but by then its shareholders, and some analysts, had become sceptical.
There was some reassurance in yesterday’s first-half figures. Convatec is doing well in its infusion devices division, which makes insulin pumps for diabetes sufferers, and trading is very strong in continence and critical care, which covers catheters.
Advanced wound care was disappointing, with the company still battling to win back lost customers after its supply problems, which it says are behind it. Ostomy care, which is mainly colostomy bags, was weak: organic revenue slowed 1 per cent in the first half, but grew by 0.3 per cent in the second three months.
Tellingly, Convatec said it was on track with its target of increasing group organic revenues by between 2.5 per cent and 3 per cent and the shares closed 8¾p lower at 211½p. It trades at more than 17 times last year’s earnings and yields about 2 per cent, so is hardly expensive relative to, say, Smith & Nephew.
What it has is a credibility problem. Talk to management and they are confident about growth targets and enthuse about the long-term potential. Yet the market doesn’t really buy it; at least not yet.
If you own Convatec shares, it would clearly be mad to sell and lose money. If you don’t, it would make sense to wait until the group starts to deliver on more of its promises and unwelcome surprises become a thing of the past.
Sage
It says good things about a company when it has big growth ambitions, particularly in a sector that the rest of us find it hard to get excited about. The danger is when it sets a target it can’t meet, then has its feet held to the fire by nervous analysts and worried shareholders.
It’s not yet clear whether Sage has done this, but the next three months are likely to be nail-biting to say the least; it’s worth staying in for the ride.
Sage is one of Britain’s biggest listed technology groups. Founded in 1981 by an entrepreneur, David Goldman, who wanted to automate his own business’s book-keeping, it is best known for accounting software, although it also makes tech kit for HR departments, including for staff management and payroll.
After expanding steadily through acquisitions it has 13,000 staff and more than 3 million customers in 23 countries from Europe to Australia and Latin America. It sells a range of software, catering for businesses from start-ups to enterprises with staff of 2,000 or more.
It is a company in transition, moving from an old model of selling software licences, mainly renewed annually, to subscriptions, which mean revenues come monthly or quarterly. Subscribers are more loyal but also much harder to win.
Albeit rather late, Sage has also discovered the cloud, and is moving its customers onto software that stores data in remote centres rather than on hard drives. It still sells licences to bigger businesses, mainly manufacturers, but subscriptions are the way it wants to go.
So here’s the thing. Sage is promising organic revenue growth of 7 per cent this year. In a trading update yesterday, it told us that these revenues rose by 6.8 per cent in the third quarter, making for an increase of 6.5 per cent over the nine months. This means it will have to go like the clappers in the fourth quarter if it wants to hit the 12-month target.
It reckons it can do it, but it can’t rely on subscription sales, so will have to agree some big licensing deals. Its growth has been flat in the UK, weak in France but strong in central Europe, Africa and Australia. The pressure’s on. The shares, up 21½p to 646¾p yesterday, look promising long term.
ADVICE Hold
WHY Its move to subscriptions is painful but should mean rewards
