ConvaTec (CTEC) grabbed headlines in June when it abruptly terminated a supply contract with Scapa, citing the company’s acquisition of a competitor breached their agreement. These half-year results indicate why the woundcare specialist is so keen to ditch laggard contracts. Adjusted operating margins fell to just 18.6 per cent, from 22.1 per cent last year and 25.2 per cent at the time of the IPO in September 2016.
Investors, however, seem to have been expecting worse and sent the share price up 18 per cent following the results announcement. We’re less inclined to turn positive. In the first half, the group appears to have spent $14m (£11.6m) predominantly on planning its “transformation initiative” and costs are likely to mount up once more projects “move from planning to execution”. Adjusted earnings are therefore expected to fall to 13¢ per share in the year to December 2019, with no recovery forecast in 2020 (2018: 16¢).
It is also not a good sign that higher administration costs forced a reduction in research and development investment, which dropped to $23.7m in the period, equivalent to just 2.7% of revenues. New product launches were the driving force behind a slight recovery in sales in the second quarter, when all four main divisions reported an organic increase in revenue. ConvaTec needs to keep spending on innovation if it is to stand up in the competitive medical device arena.
| CONVATEC (CTEC) | ||||
| ORD PRICE: | 185p | MARKET VALUE: | £ 3.65bn | |
| TOUCH: | 184-186p | 12-MONTH HIGH: | 241p | 113p |
| DIVIDEND YIELD: | 2.5% | PE RATIO: | 28 | |
| NET ASSET VALUE: | 81¢* | NET DEBT: | 76% | |
| Half-year to 30 Jun | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
| 2018 | 921 | 88.5 | 5.0 | 1.717 |
| 2019 | 889 | 61.3 | 2.0 | 1.717 |
| % change | -4 | -31 | -60 | - |
| Ex-div: | 05 Sep | |||
| Payment: | 17 Oct | |||
| *Includes intangible asset of $2.3bn, or 116¢ a share £1=$1.22 | ||||
