JPMorgan downgrades ConvaTec on valuation

JPMorgan Cazenove downgraded its stance on shares of medical products maker ConvaTec to ‘underweight’ from ‘neutral’ on Monday, cutting the price target to 168p from 171p as it pointed to an unattractive risk/reward.

It noted that after posting a 79% gain since the 2018 results and the announcement of the new restructuring plan, ConvaTec now trades at all-time highs relative to the UK index and the European medical technology sector.

It pointed out that the shares are trading higher relative to indices than they did at the time of IPO.

While the equity story is similar to the time of IPO - defensive growth with margin expansion - the starting point for margins is significantly lower, it said.

"In terms of opex and investment, while competitors (notably Coloplast) have made significant strides, ConvaTec has stood still or taken a step back. This is most obvious in R&D and product development, where ConvaTec’s pipeline is at an all-time low.

"In our view, the most significant factor in the turnaround will be generating sales growth close to end-market growth (around 4%); with a depleted product pipeline, apparent limited growth in salesforce and more intense competition this looks challenging. Initial comments from the CEO suggest that further opex investment (beyond the transformation plan) may be required."

At 1015 GMT, the shares were down 2.9% at 206.70p.