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
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
Share price at close: 215.5p
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