Ailing Ascendis has work cut out to restore confidence
When I wrote about consumer health and care group Ascendis several months ago, there was a little bit of drama surrounding the article.
First, CEO Karsten Wellner called me up to challenge my comments. I had noted that the return on equity was low for a supposedly fast-growing company. I also believed that acquisitions were overpriced, and he assured me that Ascendis was not in fact paying too much for its foreign targets.
And second, I berated the Business Day subeditors for a headline about the group “bleeding”, when indeed the results were then looking okay.
Fast forward to the next reporting period, and with the publication of Ascendis Health interim results to December 2017, the drama continues.
First, Wellner is no longer the CEO, vacating this position almost instantly, being replaced by London-based Thomas Thomsen, who previously ran the European businesses of Ascendis. And second, huge apologies to the subs. They seemed to know what was ahead as Ascendis is now indeed a bit of a bloody mess.
In the recent set of results, the company seems to be bedding down acquisitions and is thankfully taking a rest from a hectic shopping spree.
Small-cap analyst Keith McLachlan of AlphaWealth drills down further and notes that if you strip out the acquisitive and price effects from the South African operations, it is almost certain that volumes are negative. He also points out that its recent major international acquisition, Scitec, is seeing its earnings fall quite dramatically.
McLachlan is puzzled and worried by various operational metrics. For example, despite negative volumes across the group, working capital has curiously risen and cash conversion has fallen. In fact, the cash conversion ratio has fallen from 72.5% in June 2017 to 50.1% at December 2017. “Normally, when sales go backward, a firm’s working capital would convert into cash. However, the opposite has occurred here.”
Another concern, and an immediate one for him, is debt.
“Despite management going to great lengths to demonstrate that they are below covenants on ebitda [earnings before interest, tax, depreciation and amortisation], one cannot indeed repay debt from such ebitda. You need cash to do this” says McLachlan, “and Ascendis cash flows have softened.”
Net bank debt is high at R4.6bn, but perhaps fortunately for Ascendis, 70% of that is denominated in euro and hence at very low interest rates, giving some breathing space to work on the balance sheet. Moving further up the structure, McLachlan says founding shareholder Coast2Coast Capital will also be under pressure. “It will surely be experiencing strain on its own balance sheet for funding the underwhelmingly received recent rights issue, and adding to this, Ascendis Health has not declared a dividend in this reporting period.”
McLachlan does not expect any further acquisitions as Ascendis battens down the hatches and tries to pay off debt. He says this company, which looked exciting to many of us when it listed a few years ago, is not in a good place.
My take is that Ascendis has made some elementary mistakes in recent years. It has probably overpaid for assets and did not give enough attention to organic growth. It undertook a rights issue late in 2017 at a price well above the prevailing share price, leaving Coast2Coast to underwrite the entire offer. And its founding CEO left the scene, giving no notice whatsoever to the market, which confirms the sham that corporate governance has become.
It will take time and huge effort to reinstil confidence in Ascendis. They are intent on doing the right things and Thomsen has targeted a cash conversion ratio of 75% for the year to June 2018 and an ebitda margin of 17% to 18% (currently at 16.5%).