New Holding: Avast

Avast (AVST.L, FTSE 250, Market Capitalisation: ÂŁ3049m, 319p, 3.0% of JIC Portfolio and 0.0% of JIC Top 10)

New Holding:

I have bought a new position in Avast. Avast floated last May and had a solid 2018 with revenue up 24% to $808m.

Avast is a Czech based provider of cyber security products, mainly direct to consumers. There are more than 435m people using Avast products such as its firewall, anti-hacking and anti-virus offerings.

Around 70% of its 2018 revenue of $811.5m come from desktop users, but it sees growth potential in mobile and away from home..The recent hacking of WhatsApp won’t have done its prospects any harm.

It sells mainly to consumers but has also supplies small businesses with ‘protection software’.

Its principal marketing tool is to provide a free version of the software and then upgrade customers to a premium, paid-for service. Currently, only 4.0% are on the paid-for service either implying that it is difficult to get people to upgrade or that it has great scope to persuade some oftheremainder to do so. There is significant cross-sell and up-sell potential. Last year it achieved 7.2% increase in paying users and has increased the number of products per user from 1.32 to 1.4.

The average revenue per customer increased by 8.6% to $49.24, leading to an underlying operating margin of 51%.

Strong Growth:

Avast has grown rapidly in recent years with eps growing at a compound annual rate of 51% since 2015. It looks well placed to continue to take advantage of the growing market for cyber security, both at home and on the move. It has a decent suite of products, to which it can add others and a huge customer base to which it has the potential to up-sell and cross-sell.

The business is a highly cash generative with free cash flow of $394m last year. It has paid down $200m of debt in March, reducing it to around $900m. Given the strong cash flow, I am not concerned about the debt level.

Attractive Valuation:

The valuation looks attractive to me on a December 2019 PE ratio of 13.4x for 15% growth and 12.4x December 2020 for 8% growth. Hopefully, the earnings forecast will prove conservative, and we will see further upgrades to those seen in the last year. (In September the 2019 forecasts were for earnings per share of 29cents, they are ow 30 cents). It is valued at just 11.0x free cash flow and is on a prospective dividend yield of 3.0%.

Latest News:

Q1 trading update in April read well;

“Vince Steckler, Chief Executive of Avast, commented:

“We have started the year well. Our first quarter performance has been strong, continuing the trading momentum seen in the second half of 2018.  

“The Group’s cost-effective user acquisition model and large, global user base of more than 435m users remain key competitive strengths for the business. Our market-leading levels of profitability and strong cash generation mean we continue to execute our growth strategy with confidence, and Group expectations for the full year remain unchanged.” 

Outlook 

The Group reaffirms its FY 2019 outlook for high single digit Adjusted Revenue growth, excluding FX, Discontinued Business and the sale of Managed Workplace, and broadly flat Adjusted EBITDA margin% (pre-IFRS 16 adoption).  

Avast intends to report Half Year results for the six months to 30 June 2019 on Wednesday 14 August 2019. 

I have started with a 3.0% position for which I paid 307.8p per share.

 

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