The FTSE 250 firm is well placed to profit as consumers and business seek digital protection
Thursday 16 May 2019 Author: Steven Frazer

Earlier this week Facebook’s messaging app WhatsApp became the latest big name brand to admit to falling foul of hackers, who apparently remotely installed spyware on some users’ phones.

This would seem to be a near perfect environment for technology security providers like Avast (AVST), where we believe there is a share price re-rating story to come.

Czech Republic-based Avast is one of the world’s biggest cyber security providers to consumers, with more than 435m people worldwide using its Avast and AVG firewall, anti-hacking, malware and anti-virus toolkits.

You may well have been sold one of its security packages the last time you bought a desktop PC or laptop. About 70% of 2018’s $811.5m adjusted revenue came from desktop users. But there is enormous scope to tap into the global mobile device market, namely smartphones and tablets.

The company mainly sells direct to consumers and it also supplies various endpoint protection, device performance and privacy tools, password management and parental control solutions to small businesses.

Most of its consumer users at present take the free version of basic tools, with just 4% upgrading to a bells and whistles paid-for version, although penetration rates vary across countries and regions. That implies there is ‘significant cross-sell and upsell potential’, according to analysts at Jefferies.

This 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.

The key is to convince an increasing number of users to pay up. This is gradually happening on the desktop side, albeit fairly slowly. Last year saw a 7.2% increase in paying users and Avast is selling more products per user, up from 1.32 on average to 1.4.

That fed through to an 8.6% rise in average revenue per customer which now stands at $49.24. Underlying operating profit margins were 51%.

It recently launched Avast Omni which provides protection to connected devices in the home and on the go, as well as an updated version of its secure internet browser.

Net debt of $1.14bn at year end should now be nearer to $0.9bn after a $200m repayment in March, and this is comfortably supported by strong free cash flow which stood at $394m last year. This also supports the payment of dividends, forecast to be $0.12 per share this year, implying a 3.1% yield.

The shares trade on 13 times UBS’s 2019 earnings forecast which is a rough 40% discount to Sophos (SOPH), the other FTSE 250 cyber security provider.

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