ON THE SPOT:
Ascendis fit, flush and healthy, says CEO Karsten Wellner
Business Day asks CEO Karsten Wellner why he is pitching a rights offer at a premium
Shares in Ascendis Health have perked up since Wednesday’s news that it will raise R750m from the market — but at a premium, rather than the usual discount. It’s some comfort to investors in the acquisitive pharmaceutical company — including this writer — who enjoyed a big rally in 2016, only to see the share tumble to its present R18.50. Business Day asked CEO Karsten Wellner why he was pitching a rights offer at a premium.
The current share price doesn’t reflect the value in our business – our major shareholder, Coast2Coast, knows that and that’s the reason they want to increase their shareholding, and they can’t get this if we do a rights issue on a discount. It sounds strange but it’s also strange that our share price has been dropping when we’ve reported very good numbers at the full year.
Even if you take dilution into account, our normalised FY HEPS [full-year headline earnings per share] grew 29%.
On our roadshow we got feedback from the market that they were concerned about our vendor liabilities, which are the deferred payments … to the companies we have been buying. Our bank debt is totally fine, but in SA they are a but worried, but 60% of our debt is actually in euros and matches our cash-flow generation in Europe, in hard currency.
The market appears to be worried that you’ve bitten off more than you can chew?
Our acquisitive model is very distinctive – you wrote "breakneck acquisition spree" but I definitely have to contest that. It is an acquisition spree, yes, but we have never bought a business that was not headline earnings per share accretive from day one.
We never buy businesses that are badly run and don’t have good cash flow. We also never buy young businesses that are cash-eating rather than cash-generating. We buy businesses where the entrepreneurs stay on boards.
We have bank covenants of 4.0 and we are sitting on 3.5 and we’ve said to the market we want to bring this down to 3.4. Sometimes in the market, if there’s negativity, it spirals. We know there are some hedge funds shorting us.
Can you clarify the value of the deferred liabilities?
It is R1.4bn, of which half we are settling via this rights issue.
There are also concerns about the quality of your earnings — one note released after your results accused Ascendis of "falling apart" in terms of organic growth …
If you analyse our business, that’s not the case. Let me address the concerns [of the market]: gearing levels and organic growth. Yes, SA wasn’t where it should have been, but we had some extraordinary factors. For example, Nimue, our derma-cosmeceuticals brand: we did 6% growth in Europe [but] we had a rising rand of about 9% over the period, so in local currency it showed negative growth.
We never buy businesses that don’t have good cash flow. we never buy young businesses that are cash-eating…
So going forward we will report constant currencies to show how the businesses are doing in their jurisdictions.
In [supplements brand] Solal we see double-digit growth in Dis-Chem and Clicks.
I don’t want to find excuses but we had a drought that hindered the Phyto-Vet division – but even with the drought we had double-digit growth.
In medical devices, we had double-digit sales and profit growth. To say our organic growth is falling apart is point-blank not true.
At the moment our organic growth is on good track and will show a much better number in the half-year results.
The last point from investor feedback was that the market wanted us to bed down the big acquisitions and only [look at] no-brainer, bolt-on acquisitions. We have taken this into account and we will probably only have one small acquisition this financial year.
The note also raised worries about your working capital management.
Of the acquisitions we did in 2016, the big one was Remedica and 30% of its business goes to aid organisations. When you want to do business with aid organisations you have to keep higher stock levels on raw materials and finished goods because they require you to keep certain stock in order to act fast if there is a catastrophe anywhere in the world. So that’s the business model – it needs higher working capital.
The second [issue] is that in 2016, the areas where the business requires higher working capital did very well and the businesses where the working capital cycle is smaller didn’t do very well.
We’ve integrated the businesses and they are running according to and even above expectations. There’s no reason why our share price should drop consistently. It’s as if someone is expecting a distressed rights issue, but that is definitely not the case.