Ascendis CEO reveals health firm's cocktail for success

Cape Town - Multinational health and care company Ascendis Health [JSE:ASC] is looking for the right acquisition in Africa outside of South Africa, CEO Dr Karsten Wellner told Fin24.

The company announced its interim results for the six months until the end of December 2016 on Wednesday.

"Africa is a very important strategy for us. We are following an organic growth strategy in Africa, working with agents and distributors," said Wellner.

The company follows a different strategy regarding acquisitions in South Africa compared to Europe, he added.

"In Europe we are looking for platform companies, while in SA we look for bolt-on businesses like our recent Cipla acquisitions," Wellner told Fin24. "We still have a pipeline in SA of bolt-on acquisitions."

Wellner further said he is happy with the shareholding of Ascendis as far as black economic empowerment (BEE), international shareholders and women shareholders are concerned. International shareholding, for instance, is at 17% now compared to 5% a year ago. Currently, about 41% of sales come from Europe and 59% from Africa.

"Diversification is a huge advantage for us as it de-risks the business," said Wellner. At the same time forex put some pressure on the company's Pharma-Med division, he added, though the medical device division performed above expectation in his view.

In its continued quest to create synergies, Wellner said there are currently a number such projects the company is working on.

"Internationalisation and earning foreign revenue is one of the pillars of our success. We succeed through diversification of the mix of our revenue streams, diversified geography and diverse products," he explained. "We did not wait for Nenegate to go overseas. We already did so since 2013."

He is confident that Ascendis could announce more acquisitions towards the end of 2017.

READ: Ascendis Health concludes R7.3bn acquisitions

Outlook

Early in the reporting period Ascendis completed the acquisitions of Cyprus-based pharmaceutical manufacturer, Remedica Holdings, and European sports nutrition business Scitec International, for a combined €430m.

On the outlook for the remainder of the financial year, Wellner said synergy projects for the European acquisitions of Remedica, Farmalider and Scitec remain management’s priority while the group will continue to seek value-enhancing acquisitions locally and offshore.

“Funds of approximately R750m are available for acquisitions in the next 12 months, without the group needing to raise further equity. We are currently evaluating potential acquisitions of platform and bolt-on businesses in Europe and emerging markets as well as South Africa,” he added.

"We want to make our business a proper empire - the Ascendis Empire. We are looking at production synergies, organic growth through product development, several key export initiatives and further internationalisation of acquisitions in growth segments."

Results

Ascendis increased revenue by 66% to R3.1bn in the half year to December 2016 as the business significantly increased international sales following its two major acquisitions in Europe. Revenue has grown at a compound rate of 78% over the past five years.

The group’s normalised Ebitda increased by 89% to R541m, with the Ebitda margin increasing by 210 basis points to 17.4%.  

Headline earnings on a normalised basis increased by 105% to R310m, with normalised HEPS up 34% to 74.9 cents per share. The interim dividend was increased by 16% to 11c per share.  

The group’s foreign revenue has increased by 270% to R1.3bn, accounting for 43% of total sales and providing a natural hedge against rand volatility.

On Wednesday Ascendis announced its first acquisition in Eastern Europe with the purchase of Sunwave Pharma, an OTC nutrition and food supplements brand business in Romania. The business will be acquired for €42.5m, with a maximum deferred payment of €23m over three years based on financial targets, and will be accretive from May 2017.

READ: Ascendis Health rights offer oversubscribed

Debt to Ebitda ratio

An issue raised by some attending the interim results briefing in Cape Town was the debt to Ebitda (earnings before interest, tax, depreciation and amortisation) ratio of 3.2 as calculated at December 2016 from all the companies in the group.

An analyst (who wants to remain anonymous) told Fin24 that equates to total debt as of the end of December of R3.641bn net of cash. The cash component as of December 2016 equates to R563m.

"One should keep in mind that the headroom available in terms of its four times covenant - should the cash be applied for acquisitions - leaves headroom of about R400m before they reach a ceiling in terms of the covenant," the analyst explained to Fin24.

The company has a commitment now for its Cipla acquisitions of R325m with a deferment of R50m in July 2018. The immediate consideration for its Sunwave acquisition is €42m with a deferred payment of €20m, depending on Ebitda performance.

"The company has bank credit lines at the moment of the equivalent of R640m and cash available of R563m. So, in terms of the new acquisitions they have enough capacity to do it," said the analyst. "But in coming years they sit with €133m and R50m - deferred vendor liabilities equating to about R1.9bn, which most likely have to be financed."

The analyst said Ascendis' management appears to be positive that satisfactory contributions could materialise from the recent acquisitions, which should enable them to comfortably service the deferred vendor liabilities to the equivalent of about R1.9bn.

Ascendis' share price closed down 0.9% at R20.81 on the JSE on Wednesday.