This newly listed tech­nol­ogy stock is in an in­for­ma­tion vac­uum, so it is best avoided

Avast’s fall­ing share price looks tempt­ing but in­vestors should steer clear un­til they have more clar­ity, says James Ash­ton

The Sunday Telegraph - Money & Business - - Business -

WHAT­EVER Avast has got I hope it is not catch­ing. The an­tivirus soft­ware provider ap­pears to have been quar­an­tined by the City since it floated in mid-may. Greeted with great fan­fare as Europe’s largest tech­nol­ogy flota­tion of the year, it didn’t take long for would-be in­vestors to con­tract a nasty case of the jit­ters. Avast’s price range was set at 250p to 320p and the shares priced right at the bot­tom. From there, what might have been re­garded as a mar­ket snif­fle has pro­gressed to full-on pneu­mo­nia as the price has dropped by 13pc, valu­ing the com­pany at a shade over £2bn. So much for be­ing priced to go. It goes to show that tech stocks are not al­ways a short­cut to riches – un­less you hap­pen to be the share­hold­ers sell­ing at the flota­tion. The sellers in this case are worth not­ing. CVC Cap­i­tal Part­ners, one of the grand­dad­dies of pri­vate equity, took a mi­nor­ity stake in Avast four years ago. It has cashed in £169m of shares along with fel­low in­vestor Sum­mit Part­ners but re­tains a 23pc stake. Rich pick­ings, but a slid­ing share price is no way for hard-headed CVC chief Don­ald Macken­zie to cel­e­brate 30 years at the firm.

Al­ways keen to stay out of the lime­light, CVC has a colour­ful past. Re­mem­ber, this is the buy­out firm that some in­vestors still blame for turn­ing Deben­hams into a high street husk by the time it was re­turned to the public mar­kets.

Will Avast match that dis­ap­point­ment? Moody’s, the credit rat­ings agency, es­ti­mates that flota­tion pro­ceeds will bring down the ra­tio of ad­justed gross debt to un­der­ly­ing earn­ings by 0.7 to 3.8 times as of the end of the last fi­nan­cial year. That is still well bor­rowed. Mean­while in April S&P Global Rat­ings low­ered its fore­cast for growth and mar­gins this year, warn­ing of a po­ten­tial de­cline in Avast’s SME mar­ket, where there has been sales dis­rup­tion from the in­te­gra­tion of key ac­qui­si­tion AVG.

Founded in 1988 by Czech soft­ware en­trepreneurs Pavel Baudis and Ed­uard Kucera – who re­tain a com­bined 38pc stake – Avast pro­vides se­cu­rity to more than 435m cus­tomers on­line, in­clud­ing more than 145m mo­bile users. Re­cent high-pro­file breaches sug­gest this should be a growth mar­ket. Avast’s “freemium” model gives away a ba­sic level of cover for noth­ing in the hope that safe­ty­con­scious con­sumers will pay for more. Many don’t. A weedy 4pc of its desk­top users cur­rently pay.

It is seen as a con­sumer ver­sion of Sophos, which has un­der­per­formed since we rated the stock a “hold” on these pages in Oc­to­ber. How­ever, as it nears its third an­niver­sary, Sophos shares are still show­ing 150pc gains on their sale price. And it has great mo­men­tum: it grew rev­enues at 21pc last year and 11pc the year be­fore.

Avast’s top line is less im­pres­sive. In 2016 its ad­justed rev­enues rose by a measly 2pc and last year by less than 6pc. Hardly Ama­zon pro­por­tions, al­though the com­pany does prom­ise “high sin­gle-digit” growth for 2018. A bet­ter proxy might be Sage, the ac­count­ing soft­ware firm, which is des­per­ate to make it­self over as a high-growth small busi­ness cham­pion. But slow­ing or­ganic rev­enue growth in the first half of this year of 6.3pc was pun­ished by in­vestors and the shares are vir­tu­ally un­moved from April last year when Questor ad­vised read­ers to steer clear.

Avast boasts of pre­vent­ing 2bn cy­ber at­tacks ev­ery month and re­cruit­ing boffins from world-renowned in­sti­tu­tions in­clud­ing Nasa and the Mas­sachusetts In­sti­tute of Tech­nol­ogy. What a shame it hasn’t had the time to find a fe­male di­rec­tor to join its men-only board yet.

How­ever, it has cast its net very wide for City ad­vis­ers, with a gen­er­ous eight banks on the flota­tion ticket. This crowded field may ex­plain why no one has a bad word to say about Avast – yet. A 40-day black­out on re­search from the syn­di­cate runs out on June 18. Af­ter that, it will take a lit­tle while for in­de­pen­dent an­a­lysts to get their mod­els up and the next sig­nif­i­cant event will be in­terim fig­ures in Au­gust.

It all ex­plains why buy­ing now, if tempt­ing, is fraught with risk. Shares of­ten drift when there is an in­for­ma­tion vac­uum and a com­pany is poorly un­der­stood. On bal­ance Questor would steer clear un­til Avast has proved it is in good health.

Questor says: avoid

Ticker: AVST

Share price at close: 215.5p

Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­graph.co.uk/go/ questor­rules; twit­ter.com/dtquestor

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