Sales progress prompts ConvaTec to raise dividend

Shares in ConvaTec (CTEC) received a 2 per cent boost on results day, after progress in the medical products maker’s ongoing transformation programme prompted an inaugural dividend hike of 3 per cent.

Inflationary pressures and investment in research and development (R&D) for ConvaTec’s line of wound care, ostomy, infusion, and continence products pushed operating profits down by 3.5 per cent to $204mn (£156mn) in 2021, despite sales rising over the period due to higher demand for its fastest-growing diabetes infusion products.

The firm’s turnaround began in 2019 after years of flat sales and falling profits, and suffered initially from a slump in elective surgeries due to the coronavirus pandemic. 

However, R&D spend has nearly doubled from $49mn in 2018 to $95mn in 2021, which could start paying off in 2022 as ConvaTec plans to launch three new products. Capital expenditure is expected to reach $100mn-$120mn in 2022.

The strategy involved a shrewd mix of offloading its lower-margin skin care category and a number of products in its ostomy care portfolio, in favour of acquisitions including wound biologics firm Triad Life Sciences, which is expected to complete in March.

Chief executive Karim Bitar said he expected adjusted Ebit margins to increase to at least 18 per cent in 2022, up from 17.7 per cent in the 12 months to 31 December, driven by automation in its factories.

On a forward PE ratio of 10.6, ConvaTec’s valuation is “compelling”, said Numis. The broker noted that the company is now delivering sustainable revenue growth, with an organic target of 5.5 per cent over the next year, and its focus on investing in sales, marketing, and R&D are “key to improving future prospects”. 

We agree, but caution that the firm is not out of the woods yet and note its geopolitical risks with a manufacturing plant in Belarus and a sales team in Russia. Hold.

Last IC View: Sell, 202p, 6 Aug 2020