ConvaTec’s turnaround delivers for investors

Companies that pursue intensive turnaround schemes usually do so because they’re trapped in a pattern of underperformance. This was certainly the case with medical technology group ConvaTec (CTEC), which commenced its overhaul following the arrival of chief executive Karim Bitar in late 2019.

It now appears the so-called FISBE strategy (“focus-innovate-simplify-build-execute”) has been a resounding success, with the company reporting its strongest set of annual figures since its 2016 IPO. Organic revenue was up more than 7 per cent, although reported revenue was lower because of the exit of non-core hospital care activities in 2022.

ConvaTec operates across four categories in what it calls the “structurally-growing, attractive chronic care markets”. This emphasis on chronic conditions came about as part of the FISBE plan. Nearly all of the group’s earnings are now derived from the sale of things such as insulin pumps and colostomy bags – daily necessities for people with long-term illnesses.

The company’s advanced wound-care business was its standout performer, with year-on-year sales growth of 12 per cent (and takings of $695mn). With revenue growth of just over 4 per cent, and turnover of $608mn (£479mn), the ostomy care business proved somewhat less dynamic. The group’s two other segments – continence care and infusion care – both saw sales increase by closer to 10 per cent.

According to Bitar, the firm is now “on track to deliver our medium-term margin guidance leading to double-digit compound growth in EPS”. Bears had previously cited sluggish cash generation among their complaints, but with free cash flow to equity more than doubling to $228mn, this no longer applies.

Although the shares are no longer cheap at 22.5 times consensus forward earnings, we think ConvaTec’s turnaround story remains compelling. Buy.

Last IC view: Buy, 206p, 3 August 2023