So what is going on with Ascendis?? How does a share go from 60c to more than R1-62 in 2 trading days and now retract down to 90c/share five trading days later?
In short, Ascendis (ASC) came out with a statement on the 9th of April that they manufacture Chloroquine and that there has been a significant demand for it. They are also running at full capacity supplying test kits, medical devices (ie. Respirators), medicines, masks, glove, vitamins, all being crucial in the fight against Covid-19.
Their share price shot up from 60c to R1-44, gaining 140% in one day, and closing at R1-62 the day after (reaching highs of R2-29). The day before the announcement was also interesting. Their share price rose from 46c to 60c, gaining 30%. This in itself should have raised some eyebrows, and maybe indicating that the news was available to some larger investors. But let's not go there......enough said.
2 o' Clock the afternoon of the statement's release, I added ASC's data into my program and couldn't believe the result. R6-89 in a year's time!! Obviously I had made a mistake?.........but after checking it for the third time, the figure stayed at R6-89. It was giving a 375% y-y growth rate to a share!!? The best figure I have seen before this was Sasol at R23-00 and showing 220+% growth with a target price of R75-00.
I have learned to accept my program's calculations, and not ask how, but why is it giving these values. So I had to dig into the fundamentals to find reasons why the market is giving this high of a value to ASC?
Looking at the daily graph over a 5 year period, the events of the past 7 days does not even look that significant. It looks like a small sharp hill after a very big long downhill on your Strava elevation map. It's then that you realize that the R6-90 price tag does not look out of place in the bigger picture, after all, ASC has traded at R4-80 only 6 months ago and has been as high as R28-00 in the last 4 years.
So what happened since then? The main criticism about ASC has been the amount of debt they have, especially with regards to their market cap. In finding a valuation for ASC, the best way was to compare it to its peers. Aspen was chosen, as it is in the same sector, also with a global footprint and is competing with many of the same products that ASC supplies. So let's look at the debt.
Debt to Equity(or Debt to Market Cap) is not always the issue with most companies. For example, Sasol has lawsuits against them for a total value of about R180-00 per share and yet they traded at R22-00/share. Earnings are one of the main things lenders are concerned about when they lend money. They want to know that you can keep on repaying every month and still show a profit. A bank wants to know that your income, less expenses, can cover your payments........simple as that. So comparing ASC's total liabilities of R8.88B to Aspen's liabilities of R61.75B and their earnings of R1,01b and R5,4b respectively. We now see Debt to earnings ratios of 8,79 vs 11,43. So, in fact, ASC has less liabilities compared to their earnings than Aspen has.
Ascendis has sold 4 of their loss-making businesses over the past 2 years and as a result, has increased their earnings and it showed in the last financials.
So let's look at the growth figures for the last 6months' financials between ASC and APN.
Aspen - Revenue up 3% , EBITDA flat at 0%
Ascendis - Revenue up 12%, EBITDA up 6%
The division that showed the most growth was Remedica, which showed 30% growth compared to the previous period. They are based in Cypris and a large player in Europe and contribute about 55% of the group's earnings. With the Rand weakening by 30% vs the Euro over the past 4,5 months, these earnings have increased significantly. Taken into account that they are running at maximum production with Covid-19 over this period, and supplying some of the worst struck areas of Covid-19 (Great Britain, Italy, Spain etc.) with supplies, their earnings will contribute a lot to future earnings.
Ascendis has also impaired their intangible assets (Goodwill, Brands, Trademarks and Patents) by R4,7b, and thus cleaning their balance sheet. This has caused the Asset Value to decrease considerably. ASC 's Intangible assets now make up 47% of their total assets and APN's Intangible assets make up 55%.
In the healthcare sector, Aspen, Adcock Ingram, Medi Clinic and Netcare have PE ratios of between 9.04 and 10.9. So let's say we believe ASC to be 2/3 as good as Aspen and put them on a 6.6 PE, although they are showing better growth figures and have better revenue prospects. That would mean a share price of R4-00 per share currently. With the strengthening of Euro vs Rand (by 30%) and maximum production on most divisions, this price should be 20-40% higher on total earnings, which would mean a current share price of between R4-80 and R5-60. ASC has 70% of its assets in foreign countries and this would further contribute to its value.
Looking at Macroeconomic conditions, the healthcare stocks are defensive stocks and these are the first to recover at the end of a market cycle. Most of these shares have fallen out of favor over the past 4 years and have been in a bear trend since.
My quick valuation method is as follows. Company value = NAV + 3-6 years predicted earnings. For the NAV, I use Tangible assets + 1/2 the Intangible assets)- less Total Liabilities. For a premium defensive stock, it would be more towards the 6-year earnings, but in this case, I will use 4 years. Fair value for their NAV would be at around R0-80/share and 4 years' earnings at 6% growth would be (R1-26+R1-34+R1-40+R1-48) = R5-48 + R0-80 = R6-28 (Current valuation)
I can now understand why my program is projecting a R6-89 share price for ASC over the next year and an upper trading limit of R17-05.
Even if you take the Chloroquine, Test Kits, Respirators, Masks etc. out of the equation, this is still the Health Share with the best value and most upside potential at 90c/share.
Chloroquine and Covid-19 will surely be helping their cause, especially in Europe.