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AstraZeneca is still not converting top-line momentum into cash-flow, says UBS

Astra has affected a “momentous turnaround” in sales growth, but it has struggled to turn that top-line momentum into cash flow, according to UBS
Astrazeneca flags
UBS has downgraded Astra to ‘sell’ and cut its target price to 5,400p

AstraZeneca PLC (LON:AZN) has been downgraded to a ‘sell’ by analysts at UBS, who claim the drugs giant’s cash generation isn’t befitting of a company with an enterprise value of almost US$120bn.

Last week, the FTSE 100 group came to market with a US$3.5bn placing – the largest so far this year by a British company.

READ: AstraZeneca launches UK’s biggest cash call of 2019

Around US$1.4bn of that will be used to fund a cancer collaboration with Japanese group Daiichi Sankyo.

The rest will be used for “general corporate purposes”, including restructuring debt, which UBS reckons is a sign that Astra is struggling to convert its top-line momentum into cash flow.

“The equity raise (US$3.5bn) that went with the license deal is also aimed at refinancing near term debt, a reflection of ongoing limited cash generation in the near term and a sign of slow margin recovery,” read a note to clients.

“We estimate free cash flow of >US$8bn is required by '23 to support a current EV of US$119bn (on a sector yield), a number we can't see AZN delivering.

“We downgrade to ‘sell’ (from ‘neutral’) [and] our price target falls to 5,400p from 5,900p after scrubbing the model/CF and updating for the deal.”

Investors can’t bet on cancer success

The analysts add that Astra is trading on a forward enterprise value/ EBITDA multiple of 18x, compared to the sector average of around 10x.

“At the current valuation, the market assigns perpetuity-like positioning to the key oncology franchises, despite oncology being fast-moving and highly competitive.”

Astra shares fell 1.1% to 6,101p in mid-morning trade on Tuesday.

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