And so back to colostomy bags, catheters and insulin pumps, and to Convatec — the medical equipment maker and specialist in chronic wounds — whose life on the stock market came with some early wobbles and rapidly became much worse.
The last time that this column looked at this company, it concluded that it had some serious potential but was suffering from a bad credibility problem. Having concluded in early August that the shares should be avoided, they have since lost almost 16 per cent of their value.
Much has happened in the interim, including an overhaul of pretty much the entire management team and the introduction of a back-to-basics plan to get the company moving again and win back the trust of investors. But has anything actually changed?
Convatec was founded in 1978 as a unit inside Bristol-Myers Squibb, the American drugs group, and as well as colostomy bags and catheters it makes dressings and creams, infusion devices and treatments to prevent infection and protect skin.
It employs about 9,400 staff operating in more than 110 countries and, with annual revenues of more than $1.8 billion, previously occupied a seat in the FTSE 100. However, its ailing share price led to its relegation to the FTSE 250 index of midcap stocks.
Central to both the business model and the investment case at Convatec is the structural increase in the world’s older population who will suffer frailties and require special medical devices. The group is a global market leader in the majority of its treatments and therapies and it serves national healthcare operators, including the NHS, as well as private care providers in Britain and numerous countries overseas.
Yet early in its listed life, which began to considerable fanfare in October 2016, it managed to become its own worst enemy, aided and abetted by the private equity investors that brought it to the market, quickly offloading tranches of shares to the surprise of other shareholders.
A big early setback was the relocation of a factory from North Carolina to the Dominican Republic that was meant to cut costs but actually caused chaos in the supply chain and lost customers. Most important, however, was Convatec’s inability to meet its guidance on organic growth, initially set in ranges between 2 per cent and 3 per cent and regularly missed. Investors eventually lost faith.
This year the group developed a four-point plan to sharpen its performance — and win back its reputation — at a cost of $150 million over three years. It’s straightforward stuff: concentrate on executing sales and improving margins; research and develop new products; simplify processes; and get out of countries, markets or treatments where it doesn’t turn a reasonable profit.
It is telling that 65 per cent of Convatec’s revenues come from its top ten markets, suggesting that it has a vast line of products or activities that do not pay their way. To its credit, the company seems refreshingly honest about its previous failings and determined to set things right.
Convatec’s shares have risen by 46 per cent since its February update, but still trade at a substantial discount to its sector peers. Down 1¾p, or 1 per cent, at 176p yesterday, they cost about 17.6 times UBS’s forecast earnings for a dividend yield of more than 2.8 per cent.
The case for its markets remains the same. The argument for the company — assuming, of course, that it can deliver over the next two and a bit years — is considerably improved.
ADVICE Buy
WHY Realistic recovery plan from a market leader in its field whose shares are almost certainly undervalued
Hochschild Mining
Sometimes diversification can hint of core market weakness as much as indicate a company adding another string to its bow. In fairness, this probably isn’t the case with Hochschild Mining, which has branched out from precious metals with the acquisition of a rare earth deposit in Chile — but its move does raise a couple of questions about the risks it is taking on in a market that it clearly has researched well but has not been involved in before.
Hochschild is a precious metals miner specialising in gold and silver. Founded in 1922, listed on the stock exchange since 2006 and a constituent of the FTSE 250, it operates three mines, two in Peru — including its biggest project, Immeculada — and one in Argentina. Last year it produced 19.7 million ounces of silver and 260,000 ounces of gold, generating revenues of $704.3 million and pre-tax profit of $38.4 million.
The company has spent $56.3 million buying 93.8 per cent of the Bio Lantanidos deposit covering roughly 72,000 hectares about ten miles from the city of Concepción. The decision has been in the works since it took a 6.2 per cent stake in the project last year. The minerals it plans to extract — terbium, dysprosium, praseodymium and neodymium — have several uses, most notably in making the magnets used in electric vehicles and wind turbines, both big growth markets. The materials also should be easy to extract, at a low cost and using relatively little energy or water.
Before shareholders get too excited, though, there are several important unknowns. Hochschild has a working idea of the size of the mineable resources in the project, but won’t disclose a firm figure until it completes its own 18-month feasibility study. Nor will it go into detail about the price it has paid, save to emphasise that it thinks it was good value. That means investors will have to wait for the all-important detail about the size of the likely deposit, the cost of extracting it and its worth.
The shares, off 4½p, or 2.2 per cent, at 199¼p yesterday, trade for about 22 times Peel Hunt’s forecast earnings for a yield of 1.5 per cent. Shareholders in Hochschild should hang on.
ADVICE Hold
WHY Acquisition has potential but feasibility study crucial
