Impact4 Efficiency Targets And Kerecis Margins Will Shape Long Term Earnings Trajectory

Catalysts

About Coloplast

Coloplast develops and markets medical devices for people with intimate and chronic health care needs across chronic and acute care settings.

What are the underlying business or industry changes driving this perspective?

• Although the expanding global population of chronic care patients provides ample room for Coloplast to grow its addressable market, muted performance in China and slower adoption of digital offerings like Halo suggest that converting underlying demand into sustained high single digit revenue growth may prove harder than the current 7% to 8% CAGR target implies. This could pressure medium term top line delivery.
• Despite strong structural demand for advanced wound and tissue repair solutions and a very high gross margin profile at Kerecis, reimbursement volatility in the U.S. outpatient setting and dependence on LCD and fee schedule outcomes mean pricing and mix benefits could fall short of plan, which may limit the anticipated lift in group EBIT margin and earnings growth.
• While the creation of separate chronic and acute care units and the Impact4 focus on efficiency and technology should eventually support scalable operations, ongoing plant ramp ups in Costa Rica and Portugal and elevated wage inflation in key manufacturing hubs risk offsetting efficiency gains. This may constrain net margin expansion over the next few years.
• Although innovation in intermittent catheters, bowel care and implantable neuromodulation (INTIBIA) targets attractive long term needs in continence and urology, the long approval and launch timelines combined with recall overhangs in urology indicate that the revenue and ROIC uplift from these platforms may arrive later and more gradually than management’s 2030 ambitions assume.
• Even as increased use of AI and digital tools in order management, reimbursement handling and user support should over time enhance scalability and cash conversion, the front loaded investment required under Impact4 and uncertain adoption payback in large markets like the U.S. may dilute near term EBIT growth relative to revenue and keep free cash flow growth below its recent step up.

Assumptions

This narrative explores a more pessimistic perspective on Coloplast compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Coloplast's revenue will grow by 6.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.0% today to 20.4% in 3 years time.
• The bearish analysts expect earnings to reach DKK 6.8 billion (and earnings per share of DKK 30.24) by about December 2028, up from DKK 3.6 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as DKK7.9 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, down from 34.9x today. This future PE is lower than the current PE for the GB Medical Equipment industry at 33.4x.
• The bearish analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.11%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If Impact4 targets of 7 to 8 percent organic revenue CAGR, EBIT growing in line with or above revenue, and return on invested capital above 20 percent by 2029 to 2030 are achieved, this could support a structurally higher earnings base and justify a higher valuation multiple. This would put upward pressure on the share price through stronger revenue, EBIT and ROIC.
• Continued broad based strength in Chronic Care, with high single digit growth in laryngectomy and double digit growth in tracheostomy, plus ongoing innovation in intermittent catheters like Luja and bowel care, could drive faster and more durable volume and mix driven revenue growth than assumed, lifting net margins and earnings.
• Kerecis is expected to grow around 25 percent with a gross margin near 90 percent and an EBIT margin uplift toward 20 percent. Regulatory changes in U.S. reimbursement and fewer competing products could structurally expand its profit pool, materially enhancing group revenue, EBIT margin and earnings growth over time.
• Scaling new manufacturing capacity in Portugal and Costa Rica, combined with stable input costs and increasing use of AI and automation in back office, order and reimbursement processes, could unlock higher than expected operating leverage. This could drive gross margin and EBIT margin expansion and accelerate earnings growth.
• Improving cash generation, evidenced by adjusted free cash flow of DKK 5.2 billion and free cash flow to sales of 19 percent with guidance for lower net working capital to sales, may allow higher shareholder returns or strategic reinvestment. This could re rate the stock upward via stronger free cash flow growth and higher net profit.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Coloplast is DKK535.0, which represents up to two standard deviations below the consensus price target of DKK688.72. This valuation is based on what can be assumed as the expectations of Coloplast's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK962.0, and the most bearish reporting a price target of just DKK535.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be DKK33.4 billion, earnings will come to DKK6.8 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of DKK562.6, the analyst price target of DKK535.0 is 5.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.