Avast: a vast opportunity

Avast (AVST) is a leading consumer cyber security company that boasts more than 435m users and protects 35 per cent of the world’s PCs outside of China. The group listed in London in May 2018. Expectations of a $21.3bn (£16.6bn) addressable market by 2021 and positive, in-line recent trading have made us increasingly bullish. And it seems we’re not the only ones, with the shares hitting an all-time high in the days after it released its third-quarter update.

Avast operates a platform model, whereby it up-sells and cross-sells its paid products and services to its free user base. It has three revenue streams: consumer direct, where customers pay Avast directly; consumer indirect, where partners pay; and, small-to-mid-sized businesses. The adjusted revenue split was 81 per cent, 11 per cent and 8 per cent in 2018.

The group has grown both organically and through acquisition, including AVG Technologies – a security software company – in 2016, and Piriform – a device optimisation software provider – in 2017. Over the three months to September 2019, continuing adjusted revenues rose by 9 per cent to $218m at constant currencies. This ‘adjusted’ measure takes account of non-cash historical adjustments stemming from the AVG purchase, which are expected to be negligible after 2019.

Adjusted cash profits rose by 8.7 per cent to $122m. Meanwhile, net debt to adjusted cash profits (Ebitda) sat at 1.9 times, a reduction from 2.4 times at the half-year; somewhat reassuring, given that Avast had cited debt reduction as a reason for its IPO. This was helped by organic cash flows, and proceeds from a strategic partnership transaction with information group Ascential (ASCL). The latter paid $60.8m for a 35 per cent stake in Avast’s data analytics subsidiary Jumpshot in July.

True, there’s been some recent director selling, with non-executive director Erwin Gunst offloading his entire 1m share stake at 399p last month (0.1 per cent of Avast’s issued share capital). The sale came after the vesting of pre-IPO awards conditional on continued employment or other Avast service. Pre-IPO shareholder CVC also sold out in September, offloading 121m shares or 12.4 per cent of the share capital, which has served to remove a potential stock overhang. Brokers expect the group's other founders to remain long-term shareholders.