Why I Sold Ascendis Health

I have been following Ascendis Health since it listed and, while I was sceptical at first, I warmed to the company as I saw management executing their stated strategy.

If you see here, I even use them as an example of how acquisitive growth can work: How Does Acquisitive Growth Work?

I no longer believe this, as over time we are getting more and more subtly negative data points coming out from the Group. Therefore, I have sold my Fund’s Ascendis Health in the market and no longer hold any.

What? Why? How can I dare to change my mind?

I will keep this simple and, hopefully, intuitive:

Ascendis Health has a straightforward strategy: acquire branded healthcare businesses and backwards and forward integrate them while growing them organically both domestically and internationally.

Here is Ascendis Health’s strategy from their own presentation (see full presentation here):

Ascendis Health’s growth strategy.

If you can get it right, acquisitive and organic growth while extracting synergies (which I would argue is actually just another word for ‘organic’ growth), is an incredibly strong combination.

But most people don’t get it right.

At first, it seemed that Ascendis Health’s acquisitions were organically growing in the background while in the foreground the Group was making frantic acquisitions domestically and then internationally of increasingly large sizes. Back when it listed, I do believe that this was the case.

It all looked quite incredible and, sure, there were once-off’s across a couple years and not everything was perfect. But, in the background, it looked like they were operationally focused and not just a bunch of private equity and corporate finance types buying things and sticking them together with duct tape…

But, here is the funny thing with organic growth, it takes a while to get right or to go wrong. Businesses you have bought three or five years ago and that have exited their profit warranty periods see their original entrepreneur leave, the corporate finance types stick some CA (SA) into the role to manage the division, and with no idea what they are doing operationally, that is when things start to slide…

Despite all the slick adjustments and “normalised”/”once-off” changes, here is my best estimate of Ascendis Health’s organic growth rate (volumes, and not revenue) since listing versus the listed industry stalwart as a proxy (Clicks). As Clicks does not service the agri-sector and the drought was not Ascendis’ fault, I have shown this comparison inclusive and exclusive of the drought’s impact. One could argue, that clever operational management would’ve found another avenue to monetize the agri-business, like export, but let’s give them the benefit of the doubt:

Organic Sales Volume Growth (excluding SA Drought Impact): Ascendis Health versus Clicks Group

 

Organic Sales Volume Growth (Including Drought Impact): Ascendis Health versus Clicks Group

Sources: Ascendis Health, Clicks Group, and my own workings annualizing data to calendar years; Clicks like-for-like same store sales were used for the comparison and inflation taking out from both Groups was from Clicks reported product inflation.

Including or excluding drought does not matter.

What matters is that Ascendis Health’s sales volumes are apparently collapsing in the background.

Not just is Ascendis Health not managing to grow its existing businesses organically, but it appears that they are actually going backwards. Horribly backwards.

Now, one could argue 2016 was a tough consumer year. Sure, OK. But what about the flat-to-negative growth in 2015? Or the collapse of the growth rate from 2014 into 2015? What about the stability of same-store volume growth in Clicks?

Any which way you look at it, Ascendis Health is not performing organically, and that is a major red flag.

I have edited Ascendis Health’s growth strategy slide with some notes to take all of this into account and indicated whether they are achieving their strategy (though, note the moving goal posts and lowering targets starting to appear in the strategy as time goes on):

Scoring Ascendis Health’s Growth Strategy

While no one can dispute that Ascendis Health is achieving its stated acquisitive growth targets, I believe that they are failing at their organic growth targets.

Cutting through the corporate PR and applying a dose of logic in Ascendis Health’s growth strategy, and you can see that “Synergistic Growth” is just another form of organic growth while “International Growth” is being bought and not being grown (other than Nimue) and, thus, is acquisitive in nature.

Hence, Ascendis Health’s organic growth failure is pretty much half of their strategy failing. That means that half of their investment case is pretty much failing.

While acquisitions can stick a Group together, only organic growth matters in the long-term. Organic growth is real proof of the quality of the underlying operation and its management. Acquisitive growth can only hide the absence of organic growth for so long, especially when the “ammo” is running out.

For example, notice how Ascendis Health’s ROE has been dropping since listing as it throws more and more capital into acquisitions. Also see how the Net Debt:Equity ratio has risen sharply since listing?

This is what I mean by “the ammo is running out”, especially when your anchor shareholder has another major business to fund in the background (see here).

I don’t know and I do hope I am wrong, but the red flags are there and they are the precursor to one or a couple potential things happening that have real downside attached to them:

  1. Ascendis Health runs out of ammo, can’t acquire material businesses anymore, and has to rely on organic growth. The market is (severely) disappointed; or
  2. Ascendis Health makes a bad acquisition, write-offs, impairments and restructurings are necessary. This takes management’s eye even further off the operational ball, and the organic growth malaise accelerates. Things go from bad to worse here; or
  3. Things carry on unchanged, but more original founders of bought businesses leave, top staff in operations look around themselves and see things going badly, staff moral dwindles and volumes struggle more and more. Key staff leave. And the organic growth rate continues to decline until such a point that is can no longer be smoothed over with normalisations, adding back once-offs and pasting over acquisitive growth. The market then takes notice, and the cycle of either desperate rights issues to survive or non-core disposals begin… Or…
  4. All of the above.

All three scenarios are bad.

Like I said, I hope I am wrong. But, just in case I am right, I have sold all my Ascendis Health shares and we no longer have any exposure to this stock. Unfortunately, when you look at the facts and they differ from your opinion, you need to consider changing your opinion to fit the facts.

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