Morningstar | Lowering Lonza's FVE to CHF 210 After Announced Divestiture of Water-Care Business
Lonza's full-year results were slightly ahead of our expectations, with 9% organic sales growth and adjusted EBIT margin of 21%. With the announced divestiture of the water-care business (expected to close in the first quarter of fiscal 2019), the company's results do not include discontinued operations from water care, but the results do include the first full year of contribution from the Capsugel acquisition. After adjusting our model for the sale of the water-care business and slightly higher-than-expected near-term capital expenditures, we are lowering our fair value estimate for no-moat Lonza to CHF 210 from CHF 215.The water-care business has recently struggled with single-digit declines, despite the company's investments and sales initiatives. We like that the company is choosing to stay within a healthcare focus, as we didn't see synergies between water care and the remaining segments in the long term. We expect proceeds from the divestiture to be invested in the company's remaining segments, which fared well in 2018, with pharma and biotech leading the way with 14% organic growth. We believe that growth in biologics will continue to drive growth in pharma and biotech and were pleased to see the company expanding capacity in emerging markets for biologics.
The company announced that Richard Ridinger, who has served as CEO since 2012, will be retiring. He will soon be replaced by Mark Funk, who has been with Lonza since 2009. We believe Funk's recent experience as COO of the pharma and biotech segment positions him well for the CEO role. Lastly, we were disappointed to hear the company's announcement that it will soon cease qualitative updates for the first and third quarters, as this means less disclosure for investors.
Lonza supplies services and products that range from active pharmaceutical ingredients and stem-cell therapies to drinking water sanitizers, from vitamin B compounds and organic personal care ingredients to agricultural products, and from industrial preservatives to microbial control solutions. Co. operates in two segments: Lonza Pharma & Biotech, which clusters all of Co.'s offerings for pharmaceutical markets, focuses on providing custom development, custom manufacturing, cell therapy, viral therapeutics and bioscience solutions; and Lonza Specialty Ingredients, which includes offerings in its consumer care, agro ingredients, industrial solutions, wood protection and water treatment.
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