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Our hopes that Lonza’s recent CMD would be a positive catalysis were well and truly stymied. Investors were clearly unhappy with some of the announcements and particularly the outlook given for 2024. The share price fell by 16% on the day itself and by a further -4% on the day after the presentations.
Lonza Group Lonza Group AG
Out of the blue has come the departure of Mr Pierre-Alain Ruffieux only four weeks before the investors day. In our view, this might have happened after some strategic discussions about future targets and their achievability. As a reminder, the company had slashed its 2023 targets but confirmed that its mid-term targets should be achieved by 2024.
A CDMO business of a certain size, sales and profitability might be expected to have a good prognosis but Lonza has had to cut its FY guidance for two reasons: the pandemic-related boom of taking additional food supplements has dried up faster than expected and venture capital has become somewhat unforthcoming given the higher level of interest rates. The cut to the margin guidance is more severe than the top-line reduction. The question is what percentage of the new capacity will be utilized and for how long?
Lonza reported a very strong set of 2022 figures and sees itself as well on track to attain the mid-term guidance. 2023 will mark a dip sandwiched between two stronger years. Our more cautious estimates were beaten (sales: +7.2%; EBITDA: +25.8%) as well as the consensus (sales: +0.1%; CORE EBITDA: +2.5%). The strong beat to our EBITDA was only partly explained by divestment gains (CHF202m). 2023 profitability will take a breather due to inflationary effects and a more negative mix yoy.
It looks as if lucky Lonza has been able to mitigate the higher raw material prices – at first sight. The 20bp lower profitability looks more like a timing effect than a larger issue. However, it could become the latter in H2, if higher input costs can not be passed on. In H1, the company benefited from a large cancellation fee of ~3% of group sales), which was not seen as a one-off. Sure! This upset our investment case and our estimates were beaten by +4.7% (sales) and +12.3% (EBITDA).
Lonza reported the expected strong set of figures. There were no upside surprises (top line: AlphaValue: +3.8%; consensus: +4.1%; adjusted EBITDA – consensus: +0.2%; EBITDA: AlphaValue: -0.9%), but the comparison yoy shows a strong performance. Unfortunately, shareholders do not benefit from the strong operating development as the dividend proposal remained unchanged. We understand the divestment proceeds are reserved for future growth projects or acquisitions, but a small amount could be used to offset the provision related to the divestment.
The current situation in the CDMO arena looks a bit like an arms race and Lonza seems to have firm plans to be part of it. The recently updated mid-term guidance is the explanation to do so, in our view. Management is strongly dedicated to staying with the extraordinary high EBITDA margin for the coming years. Lonza’s hybrid investors day was well attended in Zurich, in which we participated.
… on an adjusted basis. Lonza reported some strong figures, riding the crest of the wave due to the current boom. However, the reality gives profitability a hard landing and the near-term future might be challenged by sourcing. In the adjusted figures’ parallel existence, Lonza beat consensus (sales: +3.2%; core EBITDA: +7.6%), whereas IFRS torpedoed profitability and came in below our not-too-optimistic expectations.
We had expected Lonza’s FY 2020 release would be difficult to read, but the presentation of the figures with no helpful tables requires patience to find all the jigsaw pieces. This makes the reported strong performance and margin increase less important in our view. All in all, the FY figures met our expectations. A comparison to consensus does not look very helpful as it appears not to reflect the latest changes.
