ConvaTec (CTEC) seems to be attempting to make up for several years of under-investment in its product suite. Research and development (R&D) expenditure rose 15 per cent in the first six months of the 2018 financial year, which knocked operating profit margins down by more than a percentage point to 22.1 per cent. Management thinks revenue seasonality will help claw back some of that decline by the second half, but is still targeting adjusted operating margins of between 24 and 25 per cent – down from 28 per cent just two years ago.
But increased R&D costs shouldn’t necessarily be considered a bad thing. In fact, the group needs to invest more if it is to compete in the crowded woundcare market – newer products helped drag revenue up 2.6 per cent on a like-for-like basis in the first half.
The need for further product launches has become particularly pressing since ConvaTec lost customers following problems with its supply chain last year. Delays in winning back those contracts sent revenues in the advanced woundcare business (ConvaTec’s biggest) down slightly on a like-for-like basis, although improvement in the second quarter has given management the confidence to reiterate its revenue guidance of 2.5 to 3 per cent organic revenue growth.
Broker Numis expects annual pre-tax profits and EPS of $393m (£300m) and 17.1p, respectively from $370m and 16.2p in (2017).
| CONVATEC (CTEC) | ||||
| ORD PRICE: | 227p | MARKET VALUE: | £4.45bn | |
| TOUCH: | 226-227p | 12-MONTH HIGH / LOW: | 314p | 182p |
| DIVIDEND YIELD: | 2.0% | PE RATIO: | 25 | |
| NET ASSET VALUE: | 79.4ȼ* | NET DEBT: | 93% | |
| Half-year to 30 Jun | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (ȼ) | Dividend per share (ȼ) |
| 2017 | 831 | 45.5 | 1.0 | 1.40 |
| 2018 | 921 | 88.5 | 5.0 | 1.72 |
| % change | +11 | +95 | +400 | +23 |
| Ex-div: | 06 Sep | |||
| Payment: | 12 Oct | |||
| *Includes intangible assets of $2.5bn, or 126ȼ a share £1=$1.31 | ||||
