Maybe it’s time to buy into this growth story
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.