Occupying multiple points of the value chain while focused on deleveraging
New York-listed Avantor Inc is a global provider of mission-critical products and services to customers in the biopharma, healthcare, education and government, and advanced technologies and applied materials industries.
Avantor is one of the companies that we have retained from the 2022 portfolio and the case for buying the company remains. The company is involved every step of the way when supplying products and services to its customers, ranging from scientific discovery to commercial delivery. Essentially, having a presence in the entire value chain, along with high recurring revenues and strong cash flow generation through its customised solutions to clients and its e-commerce platform enables the company to remain profitable and achieve business goals.
Previously, the company’s business of supplying chemicals for vaccine development and manufacturing — including solutions that support Covid-19 vaccines — had been quite lucrative. However, it has become less so in the latest few periods but Avantor’s financials are still strong. Its organic growth, which excludes the pandemic impact, is positive and within the company’s long-term target range. This indicates that business is resilient and not reliant on a singular source of income — one of the advantages of having a presence in the entire value chain.
In Avantor’s most recent 3QFY2022 ended Sept 30, 2022, core organic revenue growth came in at 7.8% y-o-y, well above its 4%–5% long-term target. The growth was attributable to double-digit growth from its advanced technologies and applied materials segment, high single-digit growth from its biopharma segment and mid-single-digit growth from its healthcare segment. Product-wise, proprietary materials and consumables contributed double-digit growth, services and speciality procurement had mid-single-digit growth, while third-party materials and consumables, and equipment and instrumentation both saw low single-digit growth.
Avantor’s M&A strategy of acquiring companies along the value chain such as Masterflex, Ritter and RIM Bio has proven to be effective as these companies are expected to contribute roughly US$400 million ($528.44 million) and US$130 million to the company’s revenue and ebitda respectively for FY2022. Looking ahead, the company will continue to execute its strategy of M&A with a focus on improving performance and synergies for its previous acquisitions.
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In terms of capital allocation, Avantor is committed to deleveraging as its primary near-term goal, which the company has seen much success from FY2018, where the net leverage (defined as Total debt/Adjusted Ebitda) was halved from seven times to 3.5 times. Since the company’s long-term target is to remain between two to four times net leverage, with further improvement in the net leverage through strong cash flow generation, Avantor can focus more on its M&A strategy. In its guidance for FY2022, Avantor expects its adjusted ebitda margin to expand by 1 to 1.25%, and its free cash flow to remain strong at around US$800 million.
The company’s one-year total return was –41.4% although its financials were mostly intact. Avantor has had five years of positive operating cash flow and free cash flow, as shown in the chart. Operating margins throughout this period have increased to double-digit figures, indicating the company’s stronger competitive advantage. Avantor’s earnings, operating cash flow and free cash flow yields are 4.8%, 5.6% and 3.8% respectively, which is relatively more attractive than the risk-free rate of 3.5%. The company’s liquidity is strong, with a current ratio of 1.7 times. Although the company’s net debt-to-equity ratio of 1.6 times may be a cause for concern, the company’s focus on deleveraging and its strong cash-generating ability should help improve its financial safety in the upcoming quarters. Avantor also trades at a steep discount to global peers, with a 43%, 32% and 33% discount for its P/E, EV/Ebitda and P/B ratios respectively, indicating that it is a very attractive pickup.
Sentiments-wise, the company has 15 “buy” calls, four “hold” calls, and no “sell” calls, with a consensus target price of nearly 20% above its current trading price of US$22.08. Based on our in-house valuations of the company, we believe that the intrinsic value of the company is around 25% above its current trading price. A strong, cash flow-generating business like Avantor is great for investors looking to cash in from exposure to the biopharma sector.
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Photo Credit: Bloomberg
Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
