Brokers all say BUY14 Dec 2020 21:55
Brokers views: The deal seems “strategic but somewhat opportunistic”, as analysts at broker Shore Capital put it, or as those from Jefferies said, the motivation of the deal seems to be “bulking-up230;boosting cash flows” and so “perhaps viewed as a defensive move rather than the acquisition of a novel platform technology”. UBS said that although AZ is a fast moving organisation with high levels of R&D productivity, there is “no reason” why it would be able to deliver better results on Alexion’s pipeline than the US company would on its own. However, the Swiss bank’s analysts saw geographic rationale to the deal, as AZ makes around a fifth of its sales in China and could leverage its infrastructure there. So while there is a portion on strategic rationale the UBS analysts said it “looks mostly like a financial deal to us”, as the FTSE 100 group “needs access to cash and cash flow and Alexion delivers that without diluting the top-line trajectory too much”. “The result may well be more freedom to operate going forward though as cash conversion has been poor and the pro-forma numbers point to margin accretion and better cash generation. Is the deal good value? Furthermore, Alexion is being acquired for an undemanding valuation, many analysts agreed. The NYSE-quoted shares are trading at a 40% forward p/e ratio discount to peers, the Shore Cap team noted, with rare and orphan disease “one of the more compelling growth segments of the market for growth-starved and cash-rich pharma”. Furthermore, with Alexion estimated to generate around US$1.7bn of cash in 2021 and 2022 step this up to around US$2.2bn in 2023, this suggests the Anglo-Swedish company can afford the extra debt burden relatively comfortably, said UBS, and would de-lever the additional debt burden quickly. Furthermore, the dividend would not be negatively affected and could be accretive, according to UBS’s estimates, with the dividend current not quite covered in 2021 and tight in 2022. “The Alexion cash generation would hence allow for more dividend flexibility.” Citigroup’s analysts said they like the deal “a lot”, with Alexion’s undisturbed market price seen to be 34% below its net present value and a discounted cash flow valuation pointing a fair price of £107 compared with £102 currently. On the dividend, Alexion’s cash flow contribution “dilutes the risk” to AZ’s Tagrisso from looming competition and should offset the loss of US exclusivity on Farxiga and Brilinta. Moreover, Citi said the high barriers to biosimilar entry for Soliris and Ultomiris “give AZN’s portfolio greater durability”. proactiveinvestors.co.uk
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