Maybe it’s time to buy into this growth story

Financial Mail - Investors Monthly - - Analysis - Marc Hasen­fuss

The share price of ac­quis­i­tive health brands con­glom­er­ate As­cendis — which is well off a record high of R28.97 — might sug­gest an out­break of in­vestor scep­ti­cism. This is not en­tirely sur­pris­ing. Com­pa­nies that grow rapidly by ac­qui­si­tion are prone to bouts of in­vestor doubt, sim­ply be­cause wiz­ened mar­ket watch­ers know that some­times one bad deal can quickly in­fect an en­tire or­gan­i­sa­tion.

To date there are no clear symp­toms that As­cendis has bought a lemon — but IM sus­pects the mar­ket was a tad spooked by re­cent in­ter­na­tional sports nu­tri­tion ac­qui­si­tion not per­form­ing to ex­pec­ta­tions.

But a re­cent in­vestor up­date from As­cendis cer­tainly sug­gests op­er­a­tions are hale and hearty, and that per­haps the mar­ket has not di­ag­nosed prospects re­al­is­ti­cally.

Re­view­ing the five months since close of the in­terim pe­riod to end De­cem­ber, As­cendis in­di­cated that the Pharma-Med di­vi­sion was per­form­ing strongly, with fur­ther im­prove­ments ex­pected.

In­ter­na­tional sub­sidiary Remed­ica was on track for dou­ble-digit growth and Far­malider in Spain was de­liv­er­ing re­sults that were ahead of ex­pec­ta­tions.

Though forex head­winds were still af­fect­ing mar­gins in the lo­cal pharma busi­nesses, the SA op­er­a­tions were ex­pected to im­prove com­pared with the first half due to ra­tio­nal­i­sa­tion and plant im­prove­ment projects.

There was also on­go­ing dou­ble-digit growth in the com­pany’s Med­i­cal De­vices di­vi­sion, with the loss of one agency be­ing com­pen­sated for by the adding of new brands.

The con­sumer brands seg­ment ap­pears to be sturdy as well. As­cendis re­ported fur­ther im­prove­ments in new prod­uct de­vel­op­ment, mar­ket­ing and in-fill rates — point­ing to a bet­ter sec­ond half. The com­pany is also pre­par­ing for the launch of the high-end So­lal range in SA and Aus­tralia.

The Sun­wave ac­qui­si­tion in Ro­ma­nia, ef­fec­tive from June 1, should be mar­gin en­hanc­ing and of­fer op­por­tu­ni­ties to ex­pand sales into other East­ern Euro­pean coun­tries.

The key skin­care sec­tor ap­pears to be hold­ing up well. As­cendis re­ported that con­sumer sen­ti­ment had not changed, and that there had been a launch of a new high­end range of skin care prod­ucts. The sports nu­tri­tion busi­ness in SA is ad­dress­ing low in-fill rates in trade, and has a new MD to fo­cus on syn­er­gies. Scitec also has a new MD. The Phyto Vet di­vi­sion’s bio­sciences sec­tor con­tin­ued to show on­go­ing dou­ble-digit or­ganic growth. It is also reap­ing the ben­e­fits of the high(er)mar­gin Afrikelp brand and its in­ter­na­tion­al­i­sa­tion ef­forts.

The re­cent ac­qui­si­tion of Ci­pla Vet ads a new prof­itable di­men­sion to the Phyto-Vet di­vi­sion, bring­ing a 20% earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion, and amor­ti­sa­tion mar­gin and of­fer­ing huge op­por­tu­ni­ties to ex­pand the prod­uct range into Africa.

Hope­fully the over­all sec­ond-half per­for­mance also re­in­forces no­tions that As­cendis ex­ec­u­tives are as­tute when it comes to ex­tract­ing syn­er­gies from newly ac­quired busi­nesses as well as ev­i­dence that pro­duc­tion ef­fi­cien­cies be­tween the two lo­cal plants are fat­ten­ing oper­at­ing mar­gins.

An­other pos­i­tive in­di­ca­tor will be in­creased free cash gen­er­a­tion, and the de­ter­mi­na­tion to ease gear­ing lev­els in the sec­ond half. The fi­nal div­i­dend will be telling.

The chances of As­cendis mak­ing a large ac­qui­si­tion this year seems re­mote af­ter its re­cent deal flurry — but there could be at least one com­ple­men­tary bolt-on ac­qui­si­tion made in SA.

While en­thu­si­asm for As­cendis seems to have tem­pered in the past six months, it is in­ter­est­ing to note that in­ter­na­tional share­hold­ers have grown to 20.8% of the reg­is­ter (up markedly from 16.9%).

While As­cendis prob­a­bly won’t shoot out the lights this fi­nan­cial year, the cur­rent lull in sen­ti­ment might of­fer an op­por­tu­nity to buy into a com­pelling long-term growth story at a rea­son­able price.

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