Should you Book Profit on this Health Care stock – ConvaTec?

ConvaTec Group PLC

ConvaTec Group PLC (LON: CTEC) is an FTSE 250 index listed technology and medical products company specialising in wound treatment, continence and critical care, infusion devices, and ostomy care.

Investment Rationale – SELL at GBX 204.50

• Profit Booking: CTEC’s price has surged over 16% in the past month; therefore, investors look for profit booking, as per their risk-return profile.
• Interest Rate Hike: The Federal Reserve announced a first interest rate hike (by 0.25%) in over three years and indicated seven rate hikes in 2022.
• Weak Margins: The company's gross margin, EBITDA margin, and net margin in FY21 were lower than the industry averages.
• 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.
• Technical Indicator: As the 14-day RSI (70.36) is in the overbought zone, the share price can face retracement in the short term.

FY21 Results Update for the year ended 31 December 2021 (released on 08 March 2022)

Source: Company’s Website

• Top-Line Growth: The Company has shown a 7.6% growth in revenue to USD 2.04 billion in FY21 from USD 1.89 billion in FY20, due to an increase in Advanced Wound Care and Infusion Care.
• Decrease in Operating Profits: In FY21, its operational profit was USD 204 million, while it was USD 211 million in FY20.
  

Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

* Peers: Smith & Nephew PLC, Medica Group PLC, and Mediclinic International PLC
* All selected peers are from LSE -listed companies from the healthcare sector.
* 1.00 USD = 0.75787166 GBP.

Conclusion                                                                                                                                             

Based on segmental product loss, weak margins, the decline in operating profits, macro factors, bearish technical indicators, coupled with the unfavourable Valuation conducted above, we have given a "SELL" recommendation on ConvaTec Group PLC at the current market price of GBX 204.50 (as of 22 March 2022 as at 08:25 AM GMT). 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4: Dividend Yield may vary as per the stock price movement

Note 5: Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

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