Anti-virus firm has so far been anti-investor returns too  
Thursday 28 Jun 2018 Author: Steven Frazer

Analysts at broker Jefferies have issued a rallying call to investors to back cyber security business Avast (AVST) with what they see as ‘significant scope for the shares to re-rate’. Jefferies’ Vijay Anand has slapped a 320p target on the share price, implying 48% upside from the current price.

The Czech Republic-based consumer antivirus provider has struggled to build investor support in the wake of its admission to the stock market on 15 May this year.

Avast had its stock priced initially at 250p per share when it joined the market giving the company a £2.38bn valuation, making it one of London’s largest technology company flotations in recent years. Since then the share price has sagged badly, now trading at 216p.

This has spurred Jefferies’ analysts into action, saying the ‘combination of robust top line growth, strong cash generation and an attractive dividend policy makes Avast an appealing investment opportunity’.

The company mainly sells direct to consumers, both under its own banner and through its popular AVG suite of antivirus tools, which it bought in 2016.

It also supplies various endpoint protection, device performance and privacy tools, password management and parental control solutions.

Around 435m people worldwide use Avast solutions to protect PCs, laptops and smartphones from malware and computer viruses. Most of those users take the free version of basic tools, with just 4% paying subscribers.

Part of Jefferies’ investment thinking is based on Avast convincing an increasing number of its users that paying for the full bells and whistles version provides more security from hacking attacks
and malware.

About two-thirds of 2017’s $779.5m adjusted revenue came from desktop users. We presume most of those subscriptions are agreed as an upsell when consumers purchase a new PC or laptop device.

While paid-for penetration rates vary across countries and regions, the so-called ‘freemium’ model – where basic services are given away for free in anticipation that users will upgrade down the line – is a proven and powerful marketing tool. That implies there is ‘significant cross-sell and upsell potential’, according to Jefferies.

Bolstering its investment case, the broker calculates that the stock is currently trading at a 50% discount to the European software sector average and ‘circa 40% discount to its UK peer Sophos (SOPH)’, the UK market’s alternative cyber security specialist of scale. Jefferies calculates a full year 2019 free cash flow yield of around 9%.

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