Broker tips: Convatec, Superdry, Indivior

RBC Capital Markets downgraded its target price on Convatec to 210p from 240p on Monday after the medical equipment maker warned on profits and announced the departure of its chief executive.

RBC noted that this is Convatec's second warning since its IPO and said it was reducing its FY18-20 estimates to match management guidance. The bank changed its revenue growth assumption for FY18 to 0.1% from 3% and its EBIT margin assumption to 23.3% from 24.8%,

Despite the warning and its cautious stance on the stock, RBC said the share price reset has gone too far and highlighted the fact that Convatec is still a cash generative business with attractive qualities.

"We would remind investors that Convatec is still a highly cash generative business, and at the current share price is generating a free cash flow yield of over 7%, with a dividend yield of 3%," it said.

"With the performance wanting we would hope all options are now on the table to maximise shareholder value."

Convatec shares lost as much as 33% on Monday after it revealed that it now expects full-year organic revenue growth to be flat to 1%, down from 2.5% to 3% previously. It also announced that chief executive Paul Moraviec was leaving the company.

Analysts at Peel Hunt lowered their forecasts for Superdry after the retailer announced a series of blows to its bottom line on Monday.

Superdry revealed a £10m hit to profits as a result of the hot weather seen across the UK in recent months, in keeping with what the broker had witnessed at other outfits, and also announced a £8m hit from hedging losses. Peel Hunt also downgraded its estimates by a further £5m in anticipation of accelerating digital marketing initiatives throughout the second half.

Peel Hunt kept its 'buy' rating on the firm intact despite the news, but in total revised its full-year pre-tax profit estimate lower by £25m to £87m, stating that its forecasts now looked "more achievable", but did note that investor confidence was likely to be knocked by the £8m FX blow.

The broker noted that with Superdry's offerings continuing to over-index in outerwear, with 45% of sales represented by hoodies, jackets, coats, sweats and heavier weight items, the warm start to autumn had also led to a shortfall against expected sales performance.

However, Peel Hunt said that overall brand performance was "not in question" and highlighted the fact that Superdry had enjoyed stronger sales on the few weather appropriate days throughout September.

Peel Hunt said: "After this morning's share price fall, the stock has held onto its c10x PER. This still underplays the strength of the group's balance sheet and the global prospects, although investors will need to see an acceleration in performance over peak to re-instill confidence in execution."

Pharmaceuticals business Indivior had its target price lowered from 350p to 240p by investment bank Citi due to concern that there is not “sufficient evidence” that the launch of Sublocade is accelerating.

Sublocade is a treatment designed to allow opioid addicts to avoid drug use during treatment programmes by mediating the subjective effects of opioids by contacting receptors in the brain that are activated during drug use.

Citi commented that near-term catalysts could be positive for the London-listed outfit, but argued that the company’s long-term value will be dictated largely by peak sales of the treatment, for which the investment bank reduced its estimates from $800m to $600m - versus the company's own projection for over $1.0bn

As well as lowering its target price, Citi opted to maintain its ‘neutral’ rating of Indivior’s shares.

On a positive note, Citi stated that Indivior’s “strong track record” of brand building, sales and marketing competence could be decisive in seeing-off upcoming competition with Camurus’ rival monthly depot injection technology, which is expected to receive approval on December.

Fellow competitor Dr Reddy’s Laboratories was prevented from re-launching its generic product in the United States in July until patent litigation with Indivior was concluded.

Citi was expecting a ruling on Dr Reddy's appeal in late October or early November.

Indivior was likely to win its arguments on validity and infringement, and there are other alternatives to the drug that can be sold while the patent dispute continues, US District Judge Kevin McNulty said in his ruling at the time, adding that allowing sales to continue would damage Indivior’s market share beyond repair.

On a more positive note, the analysts labelled the company's guidance of $200m to $300m for Perseris as "conservative", telling clients they saw potential upside prior to its launch.