Avantor: -15.2%
One of the most important metrics to gauge the quality of a business is its ability to generate cash flow and Avantor is one stock that has consistently generated cash flow. Although the stock lost 15.2% and severely underperformed the benchmarks Nasdaq and S&P 500 which returned 20.6% and 10.5% respectively, we think that the stock is trading significantly below its intrinsic value. At its current trading price of US$19.95 ($26.81), we believe its intrinsic value is around 35% above this price based on our updated in-house valuation of the company.
To recap, Avantor is the global provider of mission-critical products and services to customers in the biopharma, healthcare, education and government, and advanced technologies and applied materials industries. More importantly, the company has a presence in the entire value chain of its business, as it is involved every step of the way when supplying products and services to its customers, ranging from scientific discovery to commercial delivery.
In the most recent 1QFY2023 ended March, its results came in line with management’s plans and guidance, with transitory headwinds playing out as expected. The transition away from its Covid-19 business impacted business profitability negatively as the company reinforces its focus on its organic (non-Covid) business. The organic growth for Avantor was –1.8% y-o-y, while adjusted ebitda and earnings per share were down 18.2% and 23.7% respectively. The relative underperformance was mainly attributable to the roll-off from Avantor’s high-margin Covid-19 business, along with higher interest expenses.
Despite being less profitable, the company’s goals and target of free cash flow and deleveraging were met, as Avantor’s free cash flow grew 42.1% over the same period and the adjusted net leverage fell from 4.0 times to 3.8 times. For the medium to long-term, this is excellent for the business, as cash generated can not only be used to deleverage which implies lower interest expenses but there is also more cash to develop the business and increase profitability.
Avantor’s consistent performance when it comes to cash flow is what makes the company attractive as the company has over five years of positive operating and free cash flow. Stronger operating margins over this period also indicate a better competitive advantage for Avantor.
See also: More upside for Indian equities despite rich valuations
Although the company’s debt levels are high, its focus on deleveraging through its consistent cash flow ability should be able to offset it. Further, in terms of financial safety, Avantor has a current ratio of 1.6 times and an interest coverage ratio of 4.3 times, which are adequate figures for the company’s liquidity and solvency. Compared to global peers, Avantor trades a steep 42%, 39% and 37% discount for its P/E, EV/Ebitda and P/B ratios respectively, indicating that it is an extremely attractive pick-up.
The stock has 17 “buy” calls, four “hold” calls and no “sell” calls, with a consensus target price of around 30% above its current trading price.
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Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
