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Questor: ConvaTec has lost its momentum so we must stomach our loss and sell
Questor share tip: the medical devices group has so far made money only for its former private equity backers and recovery looks far off
The tale of two companies offers ample evidence that the market for new share listings in London is broken.
First of all there is Aston Martin Lagonda, the sleek automobile maker whose debut on the public market has been little short of a car crash. Five months on from the £19-a-share pricing – and just when the beleaguered British motor industry could do with some good news – the shares have very nearly halved.
There is no more certain way to take the lustre off a great national success story than a baying pack of City advisers who bid up the price for the Italian and Kuwaiti backers who cashed in.
Time and again, it is a wonder that sufficient institutional funds fail to walk away from the hype generated on behalf of avaricious buyout funds that make Del Boy Trotter look like John Lewis. As for private investors, you don’t need to be sinking cash into the junior Aim market for the widows and orphans warning to hold good.
And so it was with ConvaTec, London’s largest listing of 2016. Questor initially liked the healthcare group, a maker of colostomy bags, catheters and complicated wound dressings that was built from a former division of Bristol-Myers Squibb, the drugs giant. Buoyed by stories of boosting margins and impressive cash conversion, the stock duly peaked 44pc above our tip price. Thereafter, the investment outlook has been like a gory trip to A&E.
Today the shares trade at two thirds of the offer price, an acute embarrassment for a stellar board led by former Vodafone grandee Sir Christopher Gent. Much has gone wrong, including a botched margin improvement programme, a manufacturing relocation that disrupted production and leadership upheaval.
The business is hunting for a new chief executive after the hapless Paul Moraviec left last autumn.
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What also jars is that a “lock-up” agreement was dropped so private equity backers Avista Capital and Nordic Capital could sell down their holdings double-quick.
The broader trends are still encouraging, including a greater incidence of chronic health conditions and the shift towards longer life expectancy. But the next boss needs to mount precisely the sort of turnaround that buyout houses boast of in their glossy literature. To start with, the stand-in leader, Rick Anderson, has committed $150m (£114m) over three years for a transformation that will initially depress profits.
Two areas that require focus are ConvaTec’s portfolio, which needs streamlining because too many products generate little in terms of revenue or profit. The group must also spend more on innovation; it has admitted that it was late to market with some recent launches, including its next-generation catheters.
The question for investors is whether to hold on for recovery. Bank of America Merrill Lynch said there could be more bad news ahead. The bank said it was clear enough that consensus numbers for 2021 needed to come down by something like 20pc, which does not augur well for the share price.
ConvaTec lacks momentum, as shown by the 4pc fall in underlying fourth-quarter sales. For this year, the group is guiding for top-line growth of 1pc-2.5pc. ConvaTec’s ostomy division – colostomy for the large intestine, ileostomy for the small intestine – will be a longer-term fix because it has been losing patients and suffered from weakness in the US retail sales channel.
- Questor archive: telegraph.co.uk/questor
A better bet is getting traction back into the advanced wound care division, which treats ulcers and surgical wounds with foam or gel dressings.
The tough road ahead is best shown by ConvaTec’s adjusted earnings margin. In 2013 the figure was 29.9pc, falling to 26.5pc in 2015 and 23.4pc last year. Goldman Sachs forecasts 18.6pc this year. Not surprisingly given the failure to deliver last time around, the bank is sceptical of ConvaTec’s ambition to return to north of 25pc in the medium to long term and has pencilled in 19.1pc for 2023.
The shares are trading at 13 times this year’s forecast earnings, a discount to the wider medical sector. Even though the current management have injected a healthy dose of realism into the story, it’s time to stomach the loss and move on.
Questor says: sell
Ticker: CTEC
Share price at close: 135.1p
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