Coloplast Stock: Great Quality And Growth But Priced To Perfection (OTCMKTS:CLPBY)

We present our note on Coloplast (OTCPK:CLPBY) (OTCPK:CLPBF), a leading global supplier of intimate healthcare products, with a Hold rating. We are drawn by Coloplast’s strong product portfolio, high market share, and customer stickiness, but we find the stock fully valued. We will provide a description of the firm, analyze its business model and product portfolio, value the company, and discuss risks to our rating.

Introduction to Coloplast

Coloplast is a Danish multinational medical device company that develops, manufactures, and markets products and services for people with very personal and private medical conditions. Coloplast’s business includes Ostomy Care (for people who have gone through surgery to bypass the body’s waste via the stoma/ostomy), Continence Care (for people with urinary system problems), Wound & Skin Care (dressings for treating chronic wounds), Interventional Urology, and Voice & Respiratory Care (for people who had their larynx removed or had an opening created in their neck to facilitate breathing). Around 57% of group revenue is generated in Europe, 26% in other developed markets, and 17% in emerging markets. Coloplast is listed on the Danish Stock Exchange and has a current market capitalization of nearly DKK188 billion, or $27 billion.

Strong product portfolio and high-quality business model

Coloplast has a strong diversified portfolio of superior clinically differentiated products with leading market positions across Ostomy Care (35 – 40% market share), Continence Care (40 – 45% market share), and Voice & Respiratory Care (ca. 85% market share). Coloplast’s chronic care model ensures predictable revenue streams and stable growth. Approximately each new patient per year secures 10-30 years of predictable revenue. Coloplast has low churn rates and fosters long relationships with its customers.

The business benefits from various trends, including demographics (as the aging population increases the customer base for the firm) and the expanding healthcare coverage for patients in the emerging markets. The company estimates that its addressable markets will grow by 4-5% per year – however, the company itself will grow by nearly double that. Coloplast has an impressive organic growth track record: its slowest growth was in the year 2019/2020 at 4%. The company’s growth has been highly consistent and above its peer group, demonstrating strong execution and a superior competitive positioning. Coloplast’s growth stands out amongst the European medical technology sector.

Margin pressure and recovery

Coloplast has faced margin pressure in the last few years as a result of cost inflation that has not been fully passed through. As Coloplast patients rely on reimbursements, increasing prices is challenging and there is a significant lag. Input costs are expected to decrease in the current FY, as raw materials inflation has moderated and freight and energy costs are now stabilizing. Coloplast had a good start to the FY with a positive Q1 print as organic growth and EBIT margins beat sell-side analyst consensus expectations by 100 basis points and 80 basis points respectively. All segments were in good shape and targets were reiterated. Coloplast’s CFO expressed his optimism on cost development. We expect these positive cost developments to be reflected in the next FY due to the lag effect referred to above.

Strive 25

Coloplast has announced its Strive 25 strategy and provided long-term financial guidance. It aims for 8-10% of organic growth per annum and an EBIT margin of more than 30% beyond FY2024/25. The group’s organic growth will be supported by a mix of initiatives including the launch of the Clinical Performance Programme and portfolio expansions as well as the above market double-digit growth in China chronic care. Coloplast also highlights its commitment to M&A playing a more significant role in ensuring value creation and long-term growth. The firm expects to be opportunistic with regards to larger plays like Atos or Kerecis while continuing to systematically screen for opportunities in channel expansion, portfolio expansion and adjacencies, and innovative technologies. Coloplast expects continued strong FCF generation in line with historical conversion ratios and a 1% per year increase in post-tax ROIC after the trough impacted by the acquisition of Atos and Kerecis.

Kerecis acquisition

In July 2023, Coloplast announced the acquisition of Kerecis, an emerging category leader in the biologics wound care segment, for an upfront cash payment of $1.2 billion and a maximum earnout set at $100 million. The implied multiple of the transaction is 11x EV/Sales. Kerecis was started in 2009 with headquarters and manufacturing operations in Iceland. Kerecis has a proprietary product portfolio based on intact fish skin and is the only FDA–approved manufacturer of patented fish skin technology. Its setup is cost-efficient and scalable, and Kerecis is the highest growing company in its sector. The company is actively working towards its second and third-generation products. 98% of Kerecis sales were within the US and the company expects robust continued growth in the US across wound types and care settings and to expand its presence outside the US in the mid to long term. The company expects a 3-year CAGR post-integration of 30% and a stabilized EBIT margin of 20% by FY25-26. Although the multiple is rich, and the EPS accretion is ca. 1% by FY2026/27, we have a constructive outlook on the deal given the significant growth prospects of Kerecis, the high profitability, and portfolio fit and diversification. The acquisition of Kerecis and Atos, however, adds more complexity and execution should be monitored closely.

Valuation and investment recommendation

We value Coloplast using PE multiples. We forecast DKK29.5 billion in sales, DKK8.5 billion in EBIT, and DKK6.2 billion in FY24/25. Our estimates are in line with analyst consensus estimates. We moreover estimate DKK6.1 billion of free cash flow, and DKK28 of EPS. In FY23/24 we forecast an EPS of DKK24. This implies a PE ratio of 37x and a forward PE ratio of 32x. The valuation is significantly above the European medical technology sector and Coloplast’s 5-year historical median PE. While Coloplast offers above-peer growth, it is also more expensive than peers on a PEG ratio basis. We believe the stock is priced to perfection and that the current valuation leaves no room for error. Alternatively, Coloplast is currently valued at a 2.8% FCF yield. We value Coloplast at 30x forward EPS, implying a share price of DKK840 per share, and a 6% downside. We therefore issue a neutral rating on the stock. While we appreciate Coloplast’s quality and growth, we find the valuation unattractive and would avoid buying the stock at this price. We will closely monitor Coloplast and revisit the investment case if there is a correction.

Risks

Downside risks include but are not limited to slower than expected margin recovery, a slowdown in market share growth in core markets, failure to deliver on Kerecis targets, cost pressures on reimbursement, the development of new surgery techniques leading to lower demand, new entrants in chronic care, FX risk, etc.

Conclusion

We issue a Hold rating given the unattractive risk/reward at the current very rich valuation.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.