Colostomy bags, catheters, dressings and creams for chronic wounds. It is hardly the most glamorous of enterprises, if eminently worthy.
And Convatec has made extremely hard work of its business of supplying medical products to those in need almost from the moment that it floated just more than four years ago. While the group has been a long time in the recovery ward it has been making progress. It may not be the stuff of sensation but its share price is quietly creeping back towards the value it had at listing.
Convatec was created inside the American drugs group Bristol Myers Squibb in 1978 and, after several private-equity backed acquisitions, it listed on the stock market in October 2016 at 225p a share.
The company’s main customers are national healthcare operators, including the NHS, but it also supplies private hospitals. It provides its services in more than 110 countries, employs about 9,400 staff and last year generated revenues of more than $1.8 billion but profit before tax of only $18.9 million.
The early setbacks came in the form of the botched relocation of a manufacturing site from North Carolina to the Dominican Republic, which disrupted the supply chain and cost it customers. The private equity backers Nordic Capital and Avista Capital Partners began to offload their holdings sooner than other investors had expected.
Over time, however, it became clear that the group’s real problem was its inability to generate consistent growth. After several profit warnings it was swiftly demoted from the FTSE 100 index to the FTSE 250, where it remains.
Convatec’s turnaround proper began in February 2019 when the company detailed a new strategy, one that has been carried through by Karim Bitar, 55, who became chief executive that September. The idea is simple: being more in touch with the customers it serves, developing better products and delivering them with the height of efficiency.
Last year’s annual results showed clear signs of improvement. While investing in the turnaround and an acquisition-related write-off led to a sharp reduction in profits, organic revenues grew by 2.3 per cent, closer to what the business was aiming for.
This year has been dominated by Covid-19, which for Convatec meant a probable slowdown in surgical procedures and disruptions to its supply chain. First-half results for the six months to the end of June showed the emerging effects. Ostomy care, the biggest of the four divisions whose main product is colostomy bags, was holding up, although revenues dipped in the second quarter as customers reduced their stocks.
Unsurprisingly, advanced wound care, which includes dressings and creams, suffered from a drop in the number of operations as concerned patients postponed elective procedures. The continence and critical care division, which among other things makes products used in intensive care units, had a double-digit increase in revenues. The smallest unit, infusion care, also reported double-digit growth.
During the following three months all four divisions delivered growth and group revenues, stripping out the effects of currency fluctuations, over the nine months to the end of September were up by 4.8 per cent, considerably better than had been expected. This led the company to guide investors in October that annual revenue growth would be towards the higher end of its target of 2 per cent to 3.5 per cent.
The shares, up ¼p, or 0.1 per cent at 205½p, trade for 20.8 times Stifel’s forecast earnings for a prospective yield of 2.2 per cent. Those that heeded buy recommendations here should bide their time.
Advice Hold
Why It’s early days but the growth rate this year suggests the turnaround is bearing fruit
Paragon Banking Group
Buy-to-let landlords have done all right in this pandemic (Patrick Hosking writes). The great majority of tenants, bolstered by furlough money, have kept up their rental payments. Which means most landlords have been able to keep up their mortgage payments.
That is good news for Paragon, which has the bulk of its £12.2 billion balance sheet in loans to landlords. Yesterday’s full-year results were reasonably reassuring.
Underlying pre-tax profits were down 27 per cent to £120 million for the year to September after the bank lifted provisions for borrower defaults sixfold to £48.3 million.
None of that precautionary provisioning has turned into hard loan losses, yet. The proportion of borrowers in arrears of more than three months fell to 0.15 per cent.
That was partly due to the huge numbers of borrowers who opted for payment holidays in the early days of the pandemic but that seems to have been done just in case, not because they were in trouble. Almost all have resumed payments.
The volume of new business is rising again. New buy-to-let loans fell from £1.3 billion to £1.12 billion in the year, which was no surprise given the near shutdown of the housing market in the spring. However, the pipeline of future mortgage business is now at £868 million, up from £790 million at the half-year mark.
The danger, of course, is that this is a false dawn. The temporary stamp duty cuts are producing a surge of business that won’t last. Tenants may start to get into trouble as joblessness rises and furloughing is withdrawn.
The shares tanked close to penny share status in 1992 and again in 2008. But that latter dive was when Paragon was reliant on the wholesale funding market, which froze. Now it is 55 per cent funded by retail deposits and that ratio is rising fast. It is also focused on higher than average quality borrowers with more equity in the property.
Paragon has also restarted dividends, with a 14.4p final payment, after suspending them in the summer. Even after the 5 per cent rise in the share price yesterday to 455p, the shares trade on an undemanding multiple of less than 11 times and yield a prospective 4 per cent.
Advice Buy
Why Good signs on arrears, new business and margins
