ConvaTec Group PLC (LON: CTEC)  

ConvaTec Group PLC (LON: CTEC) is an FTSE 250 index listed technology and medical products Company specializing in wound treatment, continence and critical care, infusion devices, and ostomy care. The products provide benefits such as infection prevention, protection of at-risk skin, improved patient outcomes and reduced total cost of care.

Recent trend of dividend payments

CTEC had paid an interim dividend of 1.717 US cents per share attributable for H1 FY21 on 14 October 2021 with an ex-dividend date of 02 September 2021, driven by robust bottom-line profitability achieved during the period.

New Product Launches

CTEC remained on track regarding the launch of new products such as MioAdvance Extended Wear Infusion Sets and the GentleCathTM Air male catheters in 2022.

Growth Prospects

• Sustainable Growth Strategy: The Company had made accelerated progress regarding FISBE (Focus, Innovate, Simplify, Build, Execute) strategy. CTEC had strengthened the HSG business as it remained focused to acquire a quality US service provider focused on existing catheter users.
• Significant Recovery in Planned Care Division: The Planned Care division dealt with the delivery of physiotherapy services in clinics, health centres and prisons across England. The division got rebounded to pre-pandemic levels with the total mobilisation of the new contract for Community Dermatology services for Manchester and Trafford CCGs.
• Board Changes: CTEC has appointed Jonny Mason as a CFO with effect from 31 January 2022. He has an extensive track record in publicly listed and international businesses.

Key Risks

• Compliance Risk: The Company operates in a highly regulated market, and any non-compliance with rules and laws could lead to penalties and loss of reputation.
• Potential Delay in Product Launches: Any delay in rolling out treatments could lead to a loss in revenue and market share to competitors.
• Covid-19 Pandemic: The daily COVID cases in the UK surged to a record 78,610, which may result in increased restrictions over the period of time.
• Federal Reserve Meeting: The Fed would accelerate the tapering of asset purchases to USD 30 billion per month from USD 15 billion per month. Meanwhile, the interest rate hike would likely happen thrice in 2022.
• Inflation Rate: The UK inflation rate rose by around 5.1% for the 12 months to November 2021. Moreover, it had breached 10-years high ahead of the key Bank of England meeting today.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of ConvaTec Group PLC.

Novo Nordisk Foundation is the most significant shareholder as it holds nearly 395.32 million shares as of 30 September 2021.  

Q3 FY21 Trading Update (for the three months ended 30 September 2021, as of 29 October 2021)

(Source: Company Results)

• Decent Revenue Growth: The Company posted decent revenue growth of around 5.4% on an organic and constant currency basis during 9M FY21, where revenues for Q3 FY21 was up 2.7% in constant currency and 2.2% on an organic basis.
• Balance Sheet: CTEC had strengthened the balance sheet with the successful issuance of USD 500 million 2029 senior unsecured notes.

. H1 FY21 Financial Highlights (for the six months ended 30 June 2021, as of 30 July 2021)

(Source: Company Results)

• Top-Line Revenue: The company reported decent revenue growth of around 11.0%, driven by robust growth in Advanced Wound Care, against the weak COVID-depressed comparative, coupled with good growth in Infusion Care and solid performances in Continence & Critical Care and Ostomy Care.
• Profitability: The operating profit was USD 136 million, 19.9% growth on a YoY basis, reflecting the strong revenue growth and gross margin improvement.
• Balance Sheet: The group maintained a solid balance sheet with leverage of 2.0x Net Debt/Adjusted EBITDA and reported a free cash flow of USD 106 million.
  

Financial Ratios (H1 FY21)

Share Price Performance Analysis

(Source: Refinitiv; Analysis done by Kalkine Group)

On 16 December 2021, at 08:47 AM GMT, CTEC’s shares were trading at GBX 186.60, up by around 0.48% from the previous day closing price. Stock 52-week High and Low were GBX 265.00 and GBX 181.45, respectively.

From a technical standpoint, CTEC is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI of ~30.25 supports an upside momentum in the stock price. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative) 

Business Outlook

The Company had maintained strong business momentum and made further strategic progress implementing key transformation initiatives and improving execution. Moreover, CTEC expected FY21 organic revenue growth to remain towards the upper end of guidance ranging from 3.5% to 5%. Meanwhile, the Company had forecasted FY21 adjusted EBIT margin to be between 18.0-19.0% on a constant currency. The operational headwinds created by logistics and raw material inflation had dented several business segments.

However, the stock price may undergo sizeable corrections because of the record UK inflation during November 2021 and ongoing investors’ worries regarding the Omicron variant of coronavirus. Thus, it would depend on the risk appetite of the investors to take a reasonable position on this company having strong revenue visibility over the medium term.

Considering the decent financial performance during H1 FY21, new product launches, robust profitability, regular dividend payments, and support from the valuation as done using the above method, we have given a “BUY” recommendation on ConvaTec Group PLC at the current market price of GBX 186.60 (as of 16 December 2021 at 08:47 AM GMT), with lower-double digit upside potential based on 22.42x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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