Berenberg downgrades Ascential, sees risks on horizon

Ascential was under the cosh on Tuesday as Berenberg downgraded its stance on the exhibition business to 'hold' from 'buy' citing "risks on the horizon".

The bank said it has always liked the stock for its highly cash-generative business model but that disposals in the last year haven't yielded the benefits it might have thought.

"With earnings unlikely to improve in the near term, given specific brand dynamics and a possible sale of part of the company’s exhibition business leaving an almost 18% gap in group EBITDA, we believe Ascential may look to buy itself the growth that investors have become accustomed to.

"Without doing so, we struggle to see how Ascential will sustain earnings momentum and therefore hold on to its premium multiple."

Berenberg noted that Ascential's organic growth is slowing, with the company delivering just 6.4% growth on an organic constant currency basis in 2017 compared to around 10% the year before.

The bank had always believed that Ascential could deliver around 10% organic constant currency growth a year, which meant it deserved to trade at a premium to peers. But heating into a year in which the performance of the key brands could be mixed, it struggles to see meaningful upside to its estimates and reckons earnings momentum will have to be generated from acquisitions.

But Berenberg argued it was an acquisition Catch 22.

"Should Ascential dispose of its non-core exhibition brands, this would reduce group EBITDA by 18% in 2018E. Given management’s strategy of further diversifying the business into highly visible 'information services' revenues, we imagine the group would use any disposal proceeds (we estimate £200m-300m) for acquisitions.

"With Ascential disposing of businesses for c5x EBITDA, however, and buying on an average multiple of 20x pre-synergies (13x post-synergies), the company may need more firepower than currently available."

At 1110 BST, the shares were down 2.9% to 408.20p.