TL;DR Lonza seems to have a strong growth profile, and has reinvested a lot into the business. The current valuation is a little too high for me, as cash flows and risks are on the high end.
Source: Lonza
Business Profile
Source: Lonza
Lonza Group is a Swiss chemical and biotechnology MNC headquartered in Basel. They also have major facilities in Europe, North America and South Asia. The core competitive advantages of the firm are advanced manufacturing and quality-control systems, superior regulatory expertise and in-depth market knowledge. As of 2018, the firm had more than 100 sites with 15,500 employees.
Income Statement
For 2018, Lonza had fairly good profitability margins, with a net margin of almost 12%. These margins had weakened since 2017, but they were much better than 2016's figures. Revenue and earnings have also improved over the last few years, although earnings per share had decreased.
Balance Sheet
As a whole, the balance sheet of the firm seems not bad. Short-term liquidity seems on the weaker end due to the lower amount of current assets relative to current liabilities. Additionally, most of the current assets do not have strong liquidity as well. It seems that short-term liquidity had improved over time, however.
Relative to other assets, Lonza seems to hold a healthy amount of debt. When debt is compared to earnings, these figures look good. Overall, the debt profile looks fairly healthy. Overall, it seems that the debt profile of the firm had improved since 2016, although the biggest increase in debt can be seen in 2017.
Free Cashflow Analysis
For 2018 itself, the free cash flow that the firm produces is quite good. This was by a decrease in fixed assets as well as very strong earnings. However, working capital conditions had consumed more cash flow. Overall, the large increase in free cash flow is caused by the significant decrease in fixed assets as well as improved earnings. This thus resulted in a large improvement in free cash flow to equity as well. This improvement in cash flow probably led to an increase in dividends being paid out. Overall, the dividend payout ratio seems relatively neutral.
Efficiency Metrics
Overall, the firm seems more inefficient in its use of resources. This could be due to the large amount of capital that the business had taken on recently which has yet to generate the expected returns. When we look at ROE< we can see that the main cause of ROE being low is weak Asset Turnover. This is despite high net margins and high Asset/Equity. The company also reinvested much fewer resources in 2018 as compared to 2017. So far, the Return on Capital for the firm is fairly low as well, which could mean that higher reinvestment may not bring in many returns.
Valuation
As a whole, the valuation of the firm is very high. This could be due to how the market has already priced in the growth aspects of the firm. This has resulted in free cash flow yield and free cash flow to equity yield that is on the low end. In some instances, the companion variables to some of the multiples such as Net Margin and NOPAT margin are good, which could justify some of the valuation metrics. As a whole, however, I do think that the valuation for the shares could be too high.
Cost of Capital
Overall, it seems that the firm's cost of capital is lowered by the lower cost of debt, but increases due to the higher cost of equity. This is the result of the high beta of 1.4. Another driver for the increase in the cost of capital is the high market cap of the firm. Altogether, this produces a WACC of 8.53%, that is higher than the ROIC of 7.65%. Hence for investors, their capital injections are incurring most cost than returns, which is quite a bad sign. One reason for this low ROIC could be due to the long gestation period of the invested assets that have not materialised yet.
Closing Thoughts
Source: Lonza
I like the profitability of the business, but I'm more worried about the debt profile as well as cash flows. The valuation of the business seems a little too high for the current earnings of the firm. Although the market has probably priced in growth potential, I'm also concerned about the high market risk involved for shareholders.
TL;DR Lonza seems to have a strong growth profile, and has reinvested a lot into the business. The current valuation is a little too high for me, as cash flows and risks are on the high end.
Source: Lonza
Business Profile
Source: Lonza
Lonza Group is a Swiss chemical and biotechnology MNC headquartered in Basel. They also have major facilities in Europe, North America and South Asia. The core competitive advantages of the firm are advanced manufacturing and quality-control systems, superior regulatory expertise and in-depth market knowledge. As of 2018, the firm had more than 100 sites with 15,500 employees.
Income Statement
For 2018, Lonza had fairly good profitability margins, with a net margin of almost 12%. These margins had weakened since 2017, but they were much better than 2016's figures. Revenue and earnings have also improved over the last few years, although earnings per share had decreased.
Balance Sheet
As a whole, the balance sheet of the firm seems not bad. Short-term liquidity seems on the weaker end due to the lower amount of current assets relative to current liabilities. Additionally, most of the current assets do not have strong liquidity as well. It seems that short-term liquidity had improved over time, however.
Relative to other assets, Lonza seems to hold a healthy amount of debt. When debt is compared to earnings, these figures look good. Overall, the debt profile looks fairly healthy. Overall, it seems that the debt profile of the firm had improved since 2016, although the biggest increase in debt can be seen in 2017.
Free Cashflow Analysis
For 2018 itself, the free cash flow that the firm produces is quite good. This was by a decrease in fixed assets as well as very strong earnings. However, working capital conditions had consumed more cash flow. Overall, the large increase in free cash flow is caused by the significant decrease in fixed assets as well as improved earnings. This thus resulted in a large improvement in free cash flow to equity as well. This improvement in cash flow probably led to an increase in dividends being paid out. Overall, the dividend payout ratio seems relatively neutral.
Efficiency Metrics
Overall, the firm seems more inefficient in its use of resources. This could be due to the large amount of capital that the business had taken on recently which has yet to generate the expected returns. When we look at ROE< we can see that the main cause of ROE being low is weak Asset Turnover. This is despite high net margins and high Asset/Equity. The company also reinvested much fewer resources in 2018 as compared to 2017. So far, the Return on Capital for the firm is fairly low as well, which could mean that higher reinvestment may not bring in many returns.
Valuation
As a whole, the valuation of the firm is very high. This could be due to how the market has already priced in the growth aspects of the firm. This has resulted in free cash flow yield and free cash flow to equity yield that is on the low end. In some instances, the companion variables to some of the multiples such as Net Margin and NOPAT margin are good, which could justify some of the valuation metrics. As a whole, however, I do think that the valuation for the shares could be too high.
Cost of Capital
Overall, it seems that the firm's cost of capital is lowered by the lower cost of debt, but increases due to the higher cost of equity. This is the result of the high beta of 1.4. Another driver for the increase in the cost of capital is the high market cap of the firm. Altogether, this produces a WACC of 8.53%, that is higher than the ROIC of 7.65%. Hence for investors, their capital injections are incurring most cost than returns, which is quite a bad sign. One reason for this low ROIC could be due to the long gestation period of the invested assets that have not materialised yet.
Closing Thoughts
Source: Lonza
I like the profitability of the business, but I'm more worried about the debt profile as well as cash flows. The valuation of the business seems a little too high for the current earnings of the firm. Although the market has probably priced in growth potential, I'm also concerned about the high market risk involved for shareholders.