There is no way around it — Convatec makes essential products that most of us would rather not think about and would prefer not to come up against too often or too soon. It was the biggest flotation on the London market last year and, after its admission in December, possibly the fastest promotion of any recent new issue to the FTSE 100 index.
The company was brought to the market by two private equity groups and the $1.7 billion raised used to reduce uncomfortably high debts. The two sold more shares in March but retain a stake of 22 per cent.
The sale does not appear to have done the price any harm, although the shares lost 3p to 295p on yesterday’s first-quarter figures that were perhaps a little below expectations. The Convatec story is about three things. We are getting older and will increasingly need its colostomy bags, incontinence products and the like.
The company, based in Reading, sells to more than 100 countries, and there are new products coming to those markets. The ostomy division has been the laggard in recent years but has been returned to growth. There is a margin improvement programme in place that partly involves moving to lower-cost production. A facility in Greensboro, North Carolina, mainly making ostomy products, was closed during the quarter and production shifted to the Dominican Republic.
The aim is to increase margins by 3 percentage points, and the company is halfway there. The first-quarter figures contained a couple of negatives. In advanced wound care, there was pressure on pricing in France and some poor timing of orders in Europe.
The ostomy side had to cope with renegotations of prices downwards in the US with centralised health providers. This was not hugely disruptive and Convatec has an incentive to remain competitive there, where it is market leader, to keep out Coloplast, its Danish rival, which is stronger in Europe.
The company is on course to beat last year’s 4 per cent organic revenue growth, as forecast. It is cash generative and requires little capital spending, so debt will look after itself. The shares sell on 20 times earnings and while further outperformance may be limited, look like a good long-term bet.
My advice Buy
Why Shares have done well since the float but the long-term drivers, in terms of demographics and margin gains, are still there
Esure
Esure reckons to have been hit less hard than other insurers by the changes in February to the Ogden formula on victims’ compensation that have pushed up premiums by 7 per cent or so.
This means the company has been able to raise its prices in line with the change and pocket the difference, which is an attractive place to be. The first-quarter trading statement shows that Esure, which owns the Sheilas’ Wheels brand, continues to grow its car insurance side but shrink home insurance.
The latter remains highly competitive, about where motors was three years ago. One day premiums will start to rise again but, for now, cars provide the real opportunites for growth towards the target of three million policies by 2020. Esure has about 2.2 million, a rise of 9.1 per cent year on year, with motors providing a 15.1 per cent boost and home a 5.9 per cent decline.
That extra leeway on premiums will help the company when it comes to renegotiate with reinsurers at the end of June, cushioning the impact of expected rises. The shares are up by more than 25 per cent this year, after the demerger of the Gocompare.com price comparison business late last year, so the forward yield is below 5 per cent.
There is every indication that, without any further flooding or other disasters, the core operating ratio, the main measure of performance, will be at the favourable end of the guided 96 to 98 per cent this year. Still, given that rise in the price, the shares may not have much further to go for now.
My advice Avoid
Why Yield is low for sector and shares look fully valued
James Fisher and Sons
James Fisher is often lumped in with shipping and to some extent oil and gas, which is about 15 per cent of its business, neither of which have encouraged investors in the past. The company, which has a good long-term performance record, is a provider of niche marine services such as ship-to-ship handling, diving, submarine rescue and, on land, remote handling of nuclear facilities, built up through a string of acquisitions.
There were signs last year that the market was getting a handle on the business. The shares rose by more than a third, though they have not done a lot this year, adding 28p to £16.68 after a first-quarter trading statement that was confident enough, if earnings will this year be more heavily weighted to the second half.
The company has suggested that this second-half performance may be the result of some improvement in oil and gas and its work is more concentrated on keeping existing installations going than new projects, which will help even if the oil price remains below $50 a barrel.
The shares sell on almost 19 times earnings — not cheap — but should make further progress longer term, given its experience in those key areas.
My advice Buy
Why Fisher has expertise in niche technical markets
And finally . . .
To the number of specialist property vehicles that exist to provide investors with a good and reliable income must be added Civitas Social Housing. This came to the market in November as the first REIT to invest in social housing, mainly bought from housing associations. The shares were floated at £1 and were 109p on the first trading update. Civitas raised £350 million and has so far invested £132 million. For 2018, when the money is spent, it will pay a 5p dividend, offering a yield of just below 5 per cent.
