LZAGY - Lonza: The Day Has Come And We Lower Our Expectation

2023-10-18 04:43:17 ET

Summary

• Here at the Lab, post Capital Market Day, we are in a show-me-story scenario.
• Moderna contract termination is a positive short-term catalyst; however, it is an adverse concern over the biotech sector's medium-term growth projections.
• We still believe that Lonza is a buy, but the company needs to rebuild investor confidence.

Here at the Lab, in recent months, we published two analyses on Lonza (LZAGY), and we suggest our readers check up on our previous publications to get acquainted with the investment story.

1. (Jue 20th) Our Thoughts Pre Capital Market Day
2. (October 5th) Downside Scenario Already Priced In

Given the recent stock price development, we believe CMD target reiteration could be sufficient to convince investors to buy back into Lonza's investment story. The company trades on a 20% discount on an EV/EBITDA basis vs. CMDO players, and we see the CMD release as the first tap to close the valuation gap.

Post Q2 results, we anticipated a pessimistic scenario; however, following the Capital Market Day release, Lonza anticipated a 2024 EBITDA margin in the " high 20s " due to a negative one-off compared to a positive 2024 expectation with a projected EBITDA margin in the range between 31% and 33%. Today, Lonza's stock price is going down by 14%, and our internal team has moved into a show-me-story . Our recent analysis reported how Pierre-Alain Ruffieux, ex-Lonza CEO, left the company in September ' by mutual agreement. ' In the press release, there was no specific comment about his departure, but we anticipated it was due to a ' different opinion on the following strategy plan targets.' Lonza is down by 39% since June and reverses engineering Wall Street estimates on the company; we previously anticipated a 5% downside to consensus. These previous estimates did not incorporate the 2024 one-off, and once again, we report how Lonza needs to rebuild sell and buy-side (and investors) confidence. Looking at the five-year plan, over the long-term estimates, the company's medium-term objectives are more or less in line with consensus, but the market is now discounting the announcement of 2024 as a ' transition year .' It does not incorporate the below Group Mid-Term Guidance.

(Once again), the company set ambitious new goals and aims for a revenue annual sales growth of 11-13% in local currencies with an EBITDA margin between 32% and 34%. As a reminder, we anticipated the following:

The company could grow faster on the revenue line (12-15%) with a core EBITDA margin of '32-34%' in 2026. This would lead to approximately a 6-8% long-term EBITDA upgrade to Wall Street consensus, confirming our supporting buy rating.

Sales targets (above our estimates) are optimistic, and margins will likely disappoint over the period. Before going into the details of our base case scenario, we should report these announcements:

1. Given a likely termination fee with Moderna following a canceled order on mRNA COVID-19 vaccine, Lonza will receive upfront CHF 200 million (approximately $222 million) and the company's guidance for this year. The company also reported that negotiations are still ongoing. If this is the case, 2023 profitability will be higher than recently assumed, and sales will be at the upper end of the latest forecast range
2. The group did not provide any news regarding the CEO search. The leadership is currently entrusted to the Chairman of the Board of Directors, Albert Baehny
3. The company raised its dividend payout ratio to 35/45% from 25/40%

2023 has been a challenging year, and now we are entering 2024 with new question marks. Why?

1. Last week, Euroapi (29.27% owned by Sanofi) reduced its 2023 forecasts and suspended its medium-term objectives. In particular, Euroapi product solutions suffer from price pressures due to inflationary pressure and inventory reduction programs by critical customers. On the other hand, the CMDO activities are affected by project postponement due to higher financing expenses. This EBITDA decline resulted from lower sales, which led to a less favorable cost absorption than initially expected and an unfavorable margin mix, particularly in the CMDO sector. Against this background, the company has initiated a strategic review aimed at adapting its operating model and has decided to suspend the medium-term outlook for 2023-2026 communicated earlier this year
2. A few days ago, Sartorius also cut its 2023 top-line sales and margin guidance for the second time this year
3. We have a compelling picture if we combine Moderna and Kodiak Sciences news on the Lonza update. All in all, higher interest rates led to less risky biotech drug development, which will likely impact Lonza's financials and its direct competitors

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