ROB ROSE: Ascendis’s grisly turn as JSE’s worst performer

Aside from, say, Atul Gupta or Markus Jooste, few had a more miserable 2018 than the little-known Ascendis Health, tucked away in a forgettable corner of the JSE. Amid widespread carnage on the market, Ascendis took the dubious honour as the JSE’s worst performer, losing a numbing 77%.

It’s a trajectory that has, insiders say, brought its 28% shareholder, private equity company Coast2Coast, to its knees. Quite how bad it is isn’t clear, since Coast2Coast CEO Gary Shayne has gone to ground, diligently avoiding calls from the FM — which suggests it may have got pretty grisly indeed.

The question is, to what extent have Coast2Coast’s problems infected an already battling Ascendis?

If you don’t know what Ascendis is, you’re not alone. But it has built up some solid brands like Reuterina, which is the top-selling probiotic in SA. It’s also the third-largest seller of multivitamins and minerals in SA, and the second-largest supplier of pet supplements, like DermaVet. True, it also holds some dreck — like "sports nutrition business" Scitec, which punts things like "protein pancakes" and "100% whey". But the point is, it’s not all fake-bottomed hats and magic mirrors. There’s a real business there.

And yet Ascendis is experiencing the inverse trajectory of its name. If you’d put R100,000 into it when it listed in 2013, you’d have lost R59,200 of that.

One large shareholder, who would only speak anonymously, said: "Ascendis has quite a lot of debt, but fundamentally, the problem is that the main shareholder seems to be under strain and needs cash."

Founded as a private equity firm by Shayne and Cris Dillon in 2007, Coast2Coast spent $2bn buying more than 60 companies in 10 countries over the past decade. Ascendis, with aspirations of being a mini Johnson & Johnson, was its flagship success.

Only, Ascendis followed the same script. It also made the rookie error of buying too many companies and issuing too many shares, and ended up with R4.8bn in debt. In 2017, to cut this debt, Ascendis issued 37.5-million new shares to raise R750m. But it seems few investors, besides Coast2Coast, put in the cash.

Quite how costly this was became grimly clear in recent weeks, as Shayne and his companies have been forced to sell 9.2-million Ascendis shares which they’d pledged to banks as collateral. Ascendis said this was an "involuntary sale", due to a "forced sale actioned by financial institutions" as the shares were "linked to equity finance transactions, resulting in margin calls". Evidently, Shayne couldn’t come up with the money, so the banks sold the collateral to settle R37m in debt.

Ascendis has a lot of debt, but the problem is that the main shareholder seems to be under strain and needs cash

Since Ascendis CEO Thomas Thomsen has also studiously avoided speaking to the FM this week, it’s hard to say how this will affect his company.

Keith McLachlan, an analyst for AlphaWealth, says that from the start Ascendis felt like a PowerPoint company. "Initially, it looked like it was doing well and executing on its plan. But perhaps the fact it was buying so many assets obscured the fact that those it bought in the beginning were starting to struggle."

Ascendis has also been struggling to hit its targets. For example, the annual revenue growth of its organic business is just 5%, below its target of around 10%. And its return-on-equity ratio is 12.1%, some way below its target of between 23% and 27%.

Little wonder that last year some shareholders flagged "concerns" — including its "low levels of organic growth", its acquisition strategy, and high debts.

And then there is its worrying habit of steering investors towards its "normalised earnings", which conveniently strip out "one-off" costs and present a rosier picture than would otherwise be the case. For example, "normalised headline earnings" for the year to June 2018 rose 14% to R738m. But add back "one-offs" like "business combination costs" and discontinued operations, and its earnings rose a more modest 9%.

As Just One Lap founder Simon Brown put it: "If a company is aggressively making acquisitions, are these really one-off costs, or something investors need to get used to until the acquisitions cease?"

McLachlan says the accounts, with their "normalised" earnings and one-offs, suggest a company desperate to add a dollop of gloss to the façade. "In reality, the working capital was deteriorating, its cash conversion wasn’t great, and the volumes in its existing business appeared to be going backwards," he says.

Thomsen has an immense task — not just to pick up the pieces from Coast2Coast, but also to reduce Ascendis’s debt. At this point, just moving off the JSE’s worst-performing list would be an achievement.