Shares in medical products company ConvaTec (CTEC) fell 5.9% to 244.6p on Friday despite reported stronger than expected first half growth after it warned of notably higher expected cost inflation in the second half.

Constant currency full year adjusted operating margins are now expected to be between 18% and 19%, from the previously guided 18% to 19.5%, excluding currency movements.

The culprits are higher expected raw material prices and freight costs combined with planned increases in operational expenses, including research and development and selling and distribution costs.

However, guidance for organic revenue growth was increased to between 3.5% and 5% from 3%-to-4.5%, although given tough comparatives and the noted headwinds, growth in the second half is expected to be ‘back-end’ weighted.

STRONG GROWTH

First half revenues grew 7% in constant currencies to $1 billion which was better than the company’s expectations and slightly ahead of consensus.

Adjusted for the disposal of US Skincare and acquisition of Cure Medical, revenues were up 7.4% organically. The main driver was a rebound in the Advanced Wound Care division as hospital elective procedures were reduced in the first half of 2020.

Adjusted operating profit was 12.4% ahead to $204 million, representing a margin of 20.3%, an increase of 1.88% on a constant currency basis.

The interim dividend was maintained at $0.17 per share.

POSITIVE OUTLOOK

The company said it was ‘excited’ about the available opportunities for the group and remained committed to the transformation to pivot to sustainable, profitable growth.

Pharmaceuticals guru at Shore Capital Dr. Adam Barker said he was comfortable with the company’s strategy, ‘as long as investment into the cost base is driving top line performance.’

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Issue Date: 30 Jul 2021