Watching the detectives

Private investors using investigative work and patience can find profits at Ascendis

I’ve been covering smallto mid-cap stocks for nearly 40 years. They say the market is efficient and the market knows everything. But even in 2020, as it was when I started analysing stock in the 1980s, the market does not know everything. It misses much, which is why an analyst has to be much more of a detective with smaller stocks.

The market is also impatient. Here are some insights to these comments and how private investors with some basic investigative work and patience can often outgun the big boys.

Popular private client microcap stock Ascendis is one such stock. This R295m heavily indebted health-care and pharmaceutical stock is barely followed. Whenever I comment on my Twitter page on it I get hordes of queries.

In year-end results to September the year-on-year losses fell from 99.9c a share to a loss of 6c a share. It will move back into positive earnings in financial 2021.

The market wanted more despite the sharp reduction in normalised losses. The share price declined 20% after results to 60c. Admittedly not all is rosy at Ascendis. But much is being done to resuscitate this business.

While financial 2020 normalised ebitda rose 58% to R1.18bn from an 18% rise in revenue to R6.93bn, the R6.5bn debt, costing Ascendis R856m in the year to service, is the stumbling block. Almost threequarters of the debt is euro denominated. So rand weakness, even though it aided offshore earnings, piled up the debt costs.

So why at 60c do I see promise in this counter? The business is sound. One bad deal a few years ago damaged the business but the group is sorting out this mess, and new management is tackling the debt legacy.

Previous management bought Scitec, a Hungarian sports nutrition business, for €170m. This deal came with €90m of debt in 2016. It has come back to haunt Ascendis. Over the past two years R2.9bn impairments were undertaken at Scitec and midyear Ascendis sold it for €5m. The deal cost Ascendis nearly R11 a share in value — in cost, debt and writedowns.

Without Scitec, Ascendis will be a different business — profitable and certainly not trading at 60c.

New management has instigated steps to stabilise the business, which includes debt renegotiation and asset sales. A debt amend and extend agreement gave management breathing space until December 2021 — albeit at a cost.

Some deals have been done to repay debt — but more needs to be done. The crown jewel is the European pharma business Remedica. Sale of it will clear debt. Remedica, given its improved year-on-year performance, could be worth as much as R7bn. Selling it will eradicate debt, vanquish the annual finance costs and put Ascendis back on a profitable footing.

Ascendis will be less profitable sans Remedica, and a large chunk of offshore revenue and earnings will be gone. But what remains will be free of the shackles of debt and finance costs, moving Ascendis back into a normalised headline profit.

Simplistically, the R856m finance cost in financial 2020 was the equivalent of 175c a share.

Remedica in financial 2020 represented 31% of group revenue and 55% of ebitda. Its sale will be a material hit to Ascendis — as much as 150c. But its sale will still be a net benefit given the finance costs.

What will remain inside Ascendis will be profitable, with other assets contributing 25% offshore earnings. As a debt-free, profitable entity, I estimate Ascendis to be worth 300c-500c.

An international investment bank is involved and Remedica is a much cleaner, profitable and saleable candidate. I expect an update in early 2021 and the sale of Remedica will be the catalyst for a metamorphosis of Ascendis. There are risks. But as a speculative recovery stock, the patient punter could reap rewards. ●

“Ascendis will be less profitable sans Remedica. But what remains will be free of the shackles of debt