ConvaTec Group Plc

ConvaTec Group Plc (LON: CTEC) is a technologies and medical products Company that specializes in wound treatment, continence and critical care, infusion devices; and ostomy care.

On 5 March 2021, the Company will announce the year's annual results ended 31 December 2020.

Rationale for Valuation – Buy at GBX 197.50

• Revised the FY20 guidance and expects revenue to be towards the top end of the 2%-3.5% growth range.
• In FY20, the Company expects operating expenses to be lower than previous expected and adjusted EBIT margin to be between 18.5%-19% in the constant currency, with some operational gearing.
• On the liquidity front, the current ratio stood in line as compared to the industry median, reflecting sufficient current assets to pay short-term obligations and robust liquidity profile to tackle the challenging market dynamics.
• Over the past two years, the stock has outperformed the benchmark index (FTSE 250) by delivering a positive return of nearly ~45%.
• As per valuation metrics, EV/Sales, Price/Earnings, Price/Cash Flow and EV/EBITDA multiples of the CTEC are currently lower as compared to the corresponding multiples of the Healthcare Equipment & Supplies industry.
• From the technical standpoint, shares are trading well above the short-term support level of 100-day (GBX 193.60) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The business is exposed to several principal risk factors, such as cybersecurity, regulatory changes, failure to launch new products, talent management, pricing and reimbursement, commercial risk, unsuccessful integration of acquired businesses, political and economic factors.
• Besides this, the emerging risk of Covid-19 has been affecting business continuity and causing a substantial amount of financial risk.

Q3 FY20 Trading Update (for the three months ended 30 September 2020, as on 28 October 2020)

(Source: Company Website) 

• In Q3 FY20, the Company delivered a good trading performance, with an increase in reported revenue of 6.5% year-on-year. While in the nine months to 30 September 2020, the revenue was up by 4.8% in constant currency.
• It saw continued strong growth in Continence & Critical Care, a flat performance in Ostomy Care, improved Advanced Wound Care performance and significant growth in Infusion Care.
• The Company is progressing well with strategic transformation and is making investments proactively in a rephased manner based on Covid-19 conditions.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In FY20, the Company expects better performance than Q3. It expects to deliver revenue growth at the higher end of the guidance range. It also anticipates adjusted EBIT margin to be between 18.5%-19% on a constant currency basis, which has exceeded its previous guidance. The Company saw stronger customer and patient demand, mainly in the Continence and Critical Care, and Infusion Care businesses. Overall, the Company continues to implement Pivot to Sustainable and Profitable Growth strategy and maintained FY20 outlook. It is also confident in the Company's long-term growth prospects. The stock made a 52-week low and high of GBX 142.40 and GBX 224.80, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on ConvaTec Group at the current market price of GBX 197.50 (as on 18 January 2021, before the market close at 8:08 AM GMT), with lower double-digit upside potential based on 25.50x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Cranswick Plc

Cranswick Plc (LON: CWK) is a FTSE 250-listed food processor Company. It supplies fresh and value-added food products to the UK grocery retailers and food services.

On 4 February 2021, the Company will release the Q3 trading statement.

Rationale for Valuation – Buy at GBX 3,432.00

• In H1 FY21, the Company witnessed the strong performance, with exceptionally robust demand across all categories.
• It has also shown a strong balance sheet, with an increase in dividend of 12% and a reduction in net debt.
• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above the industry median.
• The debt/equity ratio recorded by the Company in the past two years was considerably below the industry median. In H1 FY21, the debt/equity ratio was 0.23x.
• As per valuation metrics, EV/Sales, Price/Cash Flow and Price/Book Value multiples are currently lower than the Consumer Non-Cyclicals industry.
• From the technical standpoint, 14-day RSI stood at around 38.37, which is supporting the upside movement.

Key Risks

• In the COVID-19 situation, the Company increased reliance on online platforms, which needs to be maintained properly to avoid cyber-attacks or fraud, failing to do so will deteriorate the Company's reputation.
• Changes in environment-related laws and regulations could affect the overall business of the Company.

Recent News

On 17 December 2020, the Company announced that it has withdrawn from the acquisition process for Inspired Pet nutrition Limited.

Financial Highlights (for the 26 weeks ended 26 September 2020 (H1 FY21), as on 24 November 2020)

(Source: Company Website)

• The Company has made a strong start to the year, with strong revenue growth of 21% (up 17.3% on LfL basis) and good earnings momentum.
• It saw robust demand from almost all categories, with a strong contribution from the new Eye poultry facility in the period.
• The Company has shown a robust balance sheet, with net debt of £54.6 million (excluding IFRS 16 lease liabilities) and £200 million of bank facilities.
• During the period, the return on capital employed surged by 66bps to 16.6% as compared with the previous year (2019: 15.9%).
• The interim dividend per share was up by 12% from 16.7 pence to 18.7 pence.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In H1 FY21, the Company maintained a robust financial position and strong trading. Moreover, the Company has a solid platform to continue successful long-term developments. Meanwhile, it registered a strong start to the year, with a robust balance sheet, strong revenue growth and good earnings momentum. It also saw a reduction in net debt and an increase of 12% YoY in the interim dividend, with exceptionally robust demand across all categories. Overall, it is a good opportunity to invest for the long term. The stock made a 52-week low and high of GBX 2,688.00 and GBX 4,126.00, respectively.

Based on decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Cranswick at the current market price of GBX 3,432.00 (as on 18 January 2021, before the market close at 8:03 AM GMT), with lower double-digit upside potential based on 22.55x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peers Information have been taken from Refinitiv, Thomson Reuters.

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

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