Performance: -18.0%
New York-listed Avantor Inc was among the underperformers in our portfolio for the four-month period, with a 18.0% loss. The company is a leading global provider of mission-critical products and services to customers in the biopharma, healthcare, education & government, and advanced technologies & applied materials industries. Avantor also supplies chemicals for vaccine development and manufacturing, including solutions that support Covid-19 vaccines.
The case for investing in the company is its lucrative business model and position as a key player in the value chain. Avantor’s business model is centred around high recurring revenues and strong and consistent cashflow generation. Its dynamic products and services are used in virtually every stage of the most important research & development and production activities of the industries they have a presence in. Given its global scale, along with customised solutions for clients and through its e-commerce platform, Avantor’s position as a key player in the value chain further reinforces its competitive advantage.
From the company’s latest results, revenue and earnings beat forecasts, mainly driven by the biopharma segment which is also the main revenue contributor of the company. As the market learns to adapt to the pandemic, Covid-specific businesses are expected to be less lucrative. This should not affect Avator much. Its core organic growth, which excludes its Covid-related business, was strong. In fact, non-Covid orders for the company’s order book now make up almost 85% of its total order book.
Meanwhile, other segments showed positive growth too. Its advanced technology and applied materials segment was supported by growth across its customer groups. Its healthcare sector was driven by higher demand for medical grade procedures, although only partially offset by the decline in Covid-related offerings. Avantor’s M&A strategy has also shown positive results. Last November, it completed the all-cash US$2.9 billion ($4.03 billion) acquisition of Masterflex, which is a global leader in peristaltic instruments. As indicated in Avantor’s most recent results, its ebitda for the financial quarter beat management’s expectations.
At current prices, the company’s yields are attractive compared to the risk-free rate of 3.2%. Avantor’s earnings yield, operating cash flow yield and free cash flow yield are 3.5%, 3.8% and 4.8% respectively. Compared to global peers, the company trades at 24% and 16% discounts for its forward PE and EV/ Ebitda, implying that it is cheap at current prices. Financial safety-wise, the company has a net debt to equity of 1.65 times, which is quite concerning at first glance. However, with a current ratio of 1.7 times and interest coverage ratio of 4.5 times, along with the company’s strategy of deleveraging and its ability to generate cash, the company’s solvency and liquidity risk should be contained and improved in the upcoming financial periods.
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Sentiment-wise, there are 16 “buy” calls, one “hold” call and no “sell” call on the company from analysts. The average target price for the company is more than 40% above its current trading price of US$29.84. Based on our revised in-house valuations, we think the company’s fair valuation is at least 20% above its current trading price.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk.
