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Uncertainty grips Ascendis

Rising debt, slow growth in revenue, forced asset sales and lurking bankers will require strong leadership.
Ascendis will rethink its strategy if the company sells its European asset, Remedica, says CEO Thomas Thomsen. Picture: Moneyweb

Like that of its bigger peer Aspen, the management of Ascendis Health is placing a lot of store in the sale of a key asset in a bid to bring debt down to manageable levels. However, unlike Aspen, the sale will force a rethink of group strategy.

The market hates uncertainty

The asset under consideration is Remedica, a high-growth generics manufacturer based in Cyprus, for which Ascendis received an unsolicited offer in January. Negotiations are underway and Ascendis has now thrown the bidding open – presumably to attract a better offer. Other assets are on the chopping block, according to the maker of skincare products, multivitamins, and nutritional pet supplements. These include the Biosciences business (Efekto, Afrikelp and Marltons) and Ascendis Direct Selling. Its Isando manufacturing facility was sold in December.

While this is going on, the company is not generating sufficient revenue to reduce debt at the pace it needs to. Net debt for the six months to December 31 rose to R5.3 billion and the ratio of debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) is now 3.9, up from 3.5 at the end of the full year in June. Driving the debt upwards was the rand weakness at the end of the period, bearing in mind that 70% of Ascendis’s bank debt is denominated in euros.

A big chunk of this debt – R879 million – comes due in the first quarter of 2020, and of this R640 million is related to Remedica.

Earnings contraction

Normalised Ebitda increased by 1% to R684 million, however the Ebitda margin contracted by 20 basis points due to the higher operating expenses.

Normalised headline earnings from continuing operations, which excludes capital profits of R19.6 million from the sale of the Isando manufacturing facility, declined by 6% to R351 million. Normalised headline earnings per share were 10% lower at 72.5 cents

Cash generated from operations totalled R502 million. The group invested R262 million in capital projects, repaid deferred vendor liabilities of R228 million, and incurred R156 million in investing and financing activities, with cash and cash equivalents totalling R239 million at the end of the period. The cash conversion rate at 73% improved from 46% in H1 2018.

“Top line growth was an arguably acceptable 3%,” says independent analyst Anthony Clark. “But this is meaningless when expenses have grown by 15%. What are these costs?”

According to Ascendis, these expenses related to increased investment in sales, marketing, distribution and head office, and the costs of Kyron Laboratories which was acquired in March 2018.

Looking down the income statement, what is concerning is that 44% of operating profit is sucked up by finance charges.

“That is an astonishing number,” says Clark. “This is a desperate situation. At this point, Ascendis needs a major asset sale. Without this it will have to face the prospect of a rights issue, which considering the share price is at its lowest point ever, is highly undesirable.”

That said, the sale of Remedica would be unfortunate, and if it goes through, will prompt further strategic restructuring. In these results, Remedica earned 56.45% of the profit for the international business, which in turn contributed 59.2% of group profit.

Following the appointment of CEO Thomas Thomsen last year the company completed a strategic business review that aimed to simplify the operations and focus on the core business areas of Pharma and Consumer Healthcare, complemented by the Medical Devices and Animal Health divisions.

The new strategic focus is targeted to generate annual organic revenue growth of 7% to 10% and Ebitda growth of 22% to 25% by the 2023 financial year.

 

Organic revenue CAGR %

Ebitda margin %

Cash Conversion %

ROE %

Net leverage

FY18 baseline

5%

17.3%

91.8%

12.1%

3.4

H1 2019

Not disclosed

17.3%

73%

10.4%

3.9

FY23 outcome range

7-10%

22-25%

77-81%

23-27%

2.5-3

Source: Moneyweb and Ascendis interim results presentation; CAGR: compound annual growth rate

Unfortunately, cash constraints have become pressing and the company no longer has the luxury of restructuring, as originally envisaged.

“The potential sale of Remedica means we need to revisit this strategy,” says Thomsen. “If Remedica is not part of the group, the pharma core will be impacted.”

Thus the rollout of the new operating model will be paused until a new strategy is finalised.

Thomsen and his team are also in discussions with their existing lenders for short term support, beyond which lenders have been asked to consider refinancing existing debt facilities. In addition, Thomsen says, consideration is being given to an equity capital raise.

Ascendis is now in a catch-22 situation, says Clark. “If you know a company is in trouble, the vultures that are circling will not pay top dollar, even for your best assets. But a capital raise will not be easy either – the share price is low, and the company’s largest shareholder is forced into a position where he needs to sell shares to meet margin calls. That does not help to stabilise a share price.”

It goes without saying that a dividend was not declared.

 

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Offshore Diversification on borrowed money. Overpaying for average assets. Foreign currency denominated debt is like an extra strength slow release laxative, slow to act, but when it starts acting…

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