Convatec 'oversold' since profit warning, Credit Suisse

UBS, which moved its rating to 'buy' from 'neutral' and trimmed the price target to 260p from 300p, said the closing market price last week of under 190p seemed to assume the ostomy division will never return to market growth, that profit margins will stabilise well below those delivered in 2016, and that non-ostomy divisions only grow 4% a year.

Last month Convatec issued a profit warning due to supply issues in both advanced wound care and ostomy care and a lower than anticipated revenue contribution from new products, which also damaged it profits margins.

The stock was hammered, with many analysts saying management had lost a lot of credibility and that future years' forecasts may need to be downgraded.

Despite the company's issues executing strategy since flotation almost exactly a year ago and recent investments at rival Coloplast, the Swiss bank's has not incorporated any of these assumptions in its basic forecast model.

Although uncertainty over near-term earnings is acknowledged as being high, UBS analysts cautiously assumed the ostomy manufacturing issues will not be resolved until late 2018, significantly holding back revenue growth and profitability.

So for the fourth quarter of 2017 and the 2018 full year, ostomy sales are forecast to fall 5%, with gross margins below guidance and cost inflation ahead of sales until 2019, all combining to weigh on earnings per share, with 2018 and 2019 forecasts both cut around 20%.

"However our 2020 estimates fall by only ~13%. The 2017 execution issues negate neither the Ostomy turnaround nor the gross margin improvement stories in our view," the analysts said.

"ConvaTec is still improving the demand for their Ostomy products even if they cannot supply this demand at present, and whilst the benefits of the Margin Improvement Program are delayed, and may cost more to deliver, they are not impaired in our view."

ConvaTec