Ascendis Health: Deep Risks Remain

See my previous article on Ascendis Health (ASC) here. I am not going to repeat what I said in that article because, as far as I am concerned, most of it remains valid.

To management’s credit, after writing the previous article, they engaged me to try dissuade my view. Nothing wrong with that, it is pretty much part of any ExCo’s job to do this.

Some minor aspects of my argument were perhaps a bit off the mark (particularly my view about who they appoint as management at business-level) but in the grand scheme of things, that is like arguing semantics.

In the background, overall volumes were soft, working capital was rising (indicating the businesses were being badly run), returns were dropping and debt was growing.

Hence, late last year, Ascendis Health had a desperate rights issue. It was not to fund an acquisition or grow the business, it was solely to de-risk its balance sheet (i.e. pay off debt). In other words, Ascendis Health was turning expensive debt into permanent dilution in an exercise of desperation because they had over-reached.

Interestingly, the rights issue was placed at a premium to the share price of ASC and Coast2Coast underwrote said placement. Pretty much no one took up shares, so Coast2Coast had to cough up the money.

(I would not like to see how stretched Coast2Coast’s own balance sheet and liquidity are right now… Don’t forget, these guys are trying to build at least two more “mini-Ascendis Health’s” in the background! In a way, Coast2Coast are becoming one of the risks to their own investment.)

Anyway, Ascendis Health reported their latest set of results last week. See their presentation over here, though ignore all the edited, normalized, adjusted numbers (often disclosed with *’s and footnotes in the presentation), and have a look at the big picture:

  • Ignoring acquisitions and pricing, Ascendis Health’s South African operation almost definitely saw negative volume growth.
  • Of the two major international acquisitions they have concluded, one of them saw revenue drop and profits pretty much halve.
  • Despite declining volumes, Ascendis Health’s working capital has risen! The one upside of shrinking businesses is normally that their working capital unwinds and their free cash flow lifts, but the opposite has happened here. Even the EBITDA-to-cash conversion has dropped by about a third…
  • While the Group goes to pains to show how their debt is reasonably covered by EBITDA, you do not use EBITDA to pay for debt. No, you can only pay for debt using cash. Hence, given that only half of EBITDA becomes cash, the Group’s balance sheet is twice as risky as it tries to portray.
  • This latter point is qualitatively acknowledged by the Group because they are quietly doing two things to try quickly shore-up the balance sheet: (1) Stopped paying dividends, and (2) Stopped acquisitions. Given how stretched Coast2Coast must be now, (1) is quite material, and given how low their growth rate it, (2) speaks volumes about their capacity at present.

I could be wrong and I could be biased, but Ascendis Health seems close to needing yet another rights issue and only their ability to extract cash from their working capital is currently between them and this dilution.

But who might fund this potential capital raise?

The only way it would be possibly attractive to non-insider investors would be if it was at a sufficient discount to the already-diminished share price…

Not a nice situation to be in.

As I said above,  as far as I am concerned, most of my original argument for selling Ascendis Health remains valid.

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