Avast PLC (LON: AVST) – Global leader with a highly attractive financial profile.

Avast PLC is a FTSE 100 quoted Company, which offers digital security and privacy products and serves over 435 million users online. It offers products and services under the AVG and Avast brands that safeguard users against cyber-attacks and evolving Internet of Things (IoT) threat landscape. Its products detect and prevent threats in real time by leveraging machine learning and artificial intelligence technologies. The Company’s digital security products are certified and top-ranked by AV-Comparatives, VB100, West Coast Labs, and AV-Test.

On 20 April 2021, Avast expects to release the Q1 FY21 trading update.

   (Source: Company Presentation)

Technology Trends and Developments

Amid Covid-19 pandemic induced restrictions, Technology has emerged as a defensive sector since the remote working environment encouraged the requirement of cloud computing, artificial intelligence, technology tools to abstain cyber-attacks, internet-of-things, among others. Avast has been investing in improving customer experience, supporting retention trends, and reducing friction. It has continued R&D in the product set and security engine by developing an integrated Avast One solution with the initial Beta test in Australia and moving deeper into privacy with BreachGuard. The Company also has expanded and enhanced its product set to tackle increased threats during Covid-19 and increase adaptability to new ways of working. Avast introduced Ransomware Shield to its popular Avast Free Antivirus and launched Remote Access Shield to Avast Premium Security to combat remote desktop vulnerabilities. Avast also released BreachGuard in the US and Europe for personalised privacy and identity protection.

   (Source: Company Presentation)

Growth Prospects and Risk Assessment

Avast has a strong and liquid balance sheet, with additional development opportunities. Moreover, it has recently appointed Shane McNamee as Chief Privacy Officer to strengthen the privacy strategy. The Company has increased the total dividend in FY20 by 8.8%, which underpins confidence in the short-term outlook. Furthermore, it operates in a large, growing, and attractive global market opportunity, while Avast is strong positioned with multiple avenues to drive long-term growth. It also experiences clear market leadership and strong brand awareness, which reflects in its nearly 435 million massive user base and over 12 million PC customers. Avast has delivered consistent growth, strong profitability, and high revenue visibility over the past years, which ensures confidence in the outlook.

However, increasing incidents of cyber-attacks can put data security at risk. Also, the travel restrictions can have an impact on new business and pipeline opportunities. Similarly, lengthening of the sales cycle could have an impact on cash flows. Adjacently, increased competition can affect the Company's leadership position and its growth trajectory.

Industry Outlook Dynamics

The UK technology sector is both diverse and broad as it is involved in the development, scaling, and implementation of various technologies, including the Internet of Things, 5G communications, and artificial intelligence. As per the Valuates’ publication, the market size for global Software as a Service is projected to reach from US$158.2 Billion in 2020 to US$307.3 Billion by 2026, representing a CAGR of ~11% during 2020 to 2026. The drivers that will influence the market size includes the convergence of artificial intelligence, increased usage of smartphones and laptops, and increased adoption of SaaS solutions for human capital management. However, increased threats to data security could impact market growth.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Avast PLC.

A Glimpse of Business Segments (FY20 Revenue Split)

Recent Developments

On 24 February 2021: Avast had announced a strategic partnership with PMovil to enhance the accessibility of cybersecurity for over 400 million PMovil customers. Moreover, PMovil is an industry leader in direct carrier billing in North America.

On 03 February 2021: AVST had announced the partnership with Westcoast to distribute antivirus software to around 9,000 trading partners across the UK. Furthermore, Westcoast is the leading distributor of IT products & services present in the UK.

Financial and Operational Highlights (for the twelve months ended 31 December 2020 (FY20), as on 03 March 2021)

(Source: Company result)

• AVST had delivered a 2.3% increase in adjusted revenue at actual rates to USD 892.9 million during FY20. Similarly, it had also shown an organic growth of 7.9% in adjusted revenue.
• The Company had shown a decent 1.2% growth in adjusted billings to USD 922.0 million during FY20.
• The consumer direct desktop adjusted revenue was USD 699.7 million during FY20, up by 10.6% at actual rates from the levels of FY19.
• On the profitability front, the adjusted EBITDA margin grew by 17 basis points to 55.5% during FY20. Also, AVST had demonstrated a 2.6% growth in adjusted EBITDA from USD 483.0 million during FY19 to USD 495.5 million during FY20.
• The diluted earnings per share were 35 US cents during FY20, while it was 32 US cents during FY19.
• The Company had managed to generate strong cash illustrated by unlevered free cash flow growth of 6.2% to USD 451.1 million and levered cash flow growth of 11.9% to USD 414.3 million during FY20.
• Regarding the liquidity, AVST had adequate cash and available liquidity of USD 215.4 million as of 31 December 2020.
• The Company had leverage of 1.5x net debt to LTM Adjusted EBITDA at the end of FY20.
• Based on its healthy financial position, the Company had paid an interim dividend of 4.8 US cents per share in October 2020. AVST will also pay a final dividend of 11.2 US cents per share on 18 June 2021, which would take the total FY20 dividend to 16.0 US cents per share. The ex-dividend date for the FY20 final dividend will be 13 May 2021.
• Moreover, Key Performance Indicators (“KPI”) like average products per customer and average revenue per customer rose by 2.8% and 4.5%, respectively, during FY20.

Financial Ratios

Share Price Performance

On 5 March 2021, at the time of writing (before the market close, at 9:20 AM GMT), Avast’s shares were trading at GBX 443.00, down by 2.25% against the previous day closing price. Stock 52-week High and Low were GBX 604.50 and GBX 263.60, respectively.

From a technical standpoint, 14-day RSI (25.87) is in the oversold zone, which is supporting the upside potential. 

In the last one year, Avast’s stock price has remained resilient with a positive return of around +10.11%; it has significantly outperformed the FTSE All-Share Telecommunication and FTSE 100 index with a return of nearly +3.03% and -1.86%, respectively.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Peers used in the valuation methodology (Price/NTM Earnings)

Business Outlook Scenario

The robust billing performance in FY20 shall support the revenue generation in H1 FY21, and therefore, Avast projects to deliver organic revenue growth between 6% to 8% in FY21. The organic billing growth shall also fall in the lower end of this range, while the adjusted EBITDA is expected to remain broadly flat in FY20 despite higher wage inflation and planned on-premises to cloud migration. Furthermore, the structural growth drivers of the industry shall create opportunities for the business in the long-term, despite the short-term macroeconomic uncertainties. Avast has been delivering a resilient financial performance while focusing on innovation and continued investment in growth.

(Source: Presentation, Company Website)

Considering the FY20 revenue and EBITDA growth, strong cash generation, increased accessibility of cybersecurity products, sound business model, robust operating performance, sustainable dividend payments, rising distribution of antivirus software and support from the valuation as done using the above method, we have given a “BUY” recommendation on Avast PLC at the current market price of GBX 443.00 (as on 05 March 2021, before the market close at 9:20 AM GMT) with lower double-digit upside potential based on 21.00x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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