The pills aren’t working for bitter Ascendis shareholders

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INVESTMENT ANALYSIS

The pills aren’t working for bitter Ascendis shareholders

New CEO has a devil of a job devising a turnaround strategy to cheer up muttering investors

Chris Gilmour


Ascendis Health has experienced a huge reversal of fortune, going from almost R30 in September 2016 to the current share price of just under R10, which is close to what it listed at in November 2013 on the JSE (now with a secondary listing on A2X).
Its majority shareholder, private equity firm Coast2Coast, is  very unhappy about this, as are institutional and retail investors who thought this new entrant to the listing space had great promise and upside appeal.
Six months ago CEO Karsten Wellner was replaced by Thomas Thomsen. His work was cut out for him, requiring the design of a turnaround strategy to simplify and strengthen the core businesses of pharma and consumer healthcare; reduce financial leverage; improve return on equity; and decrease the volatility of cash conversion.
We need a few reporting periods under Thomsen’s belt to determine whether the strategy is going to be effective.
Latest annual results were delayed, which is always a bad sign and not appreciated by the market. Due on September 11, they came out two weeks later on the 25th, reason given being the implementation of a new financial reporting system.
For the year to June 2018, Ascendis group revenue rose by 21%. However, on a comparable basis of operations, organic growth was a disappointing 5%. Normalised headline earnings per share rose by just 2%.
Under the former CEO, Ascendis embarked on a manic acquisition spree. While most purchases were high quality operations, it appears that they paid top dollar for them, especially the foreign ones. The main concern for Ascendis’s institutional shareholders was that there was a lack of a clear strategy and it seemed like the group was driving a broad, opportunistic portfolio that lacked coherence. Other concerns centred on below-target organic growth, high debt/equity and inconsistent cash conversion.
After an exhaustive period of introspection involving feedback from stakeholders, as well as peer reviews against similar operations, a new strategy emerged. Ascendis’s core competencies were concluded to be in pharma and consumer healthcare, with animal health and medical playing supporting roles. Biosciences has been classified as non-core and will be disposed of. Proceeds from the proposed divestments will be used to reduce debt and selectively reinvest in strategic acquisitions.
The next few years are likely to be tough for Ascendis as it attempts to claw its way back onto a higher, more sustainable growth trajectory.
Thomsen doesn’t have the charisma of his predecessor, but he displays a steely resolve. The bleeding has probably stopped but surgery and recovery are now required.
Chris Gilmour is an investment analyst.

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