Czech industrial prices continue to rise. Over the next few months, price growth should slow down unless we persistently see higher oil prices. Agricultural prices dropped significantly in August. Prices continue to grow in the private service sector.

Czech industrial prices continue to rise. Over the next few months, price growth should slow down unless we persistently see higher oil prices. Agricultural prices dropped significantly in August. Prices continue to grow in the private service sector.

In August, compared with July, industrial prices increased 0.1%. The year-on-year growth was 2.1%, the same as in July. Together with the market we expected flat PPI mom and slight yoy deceleration. However, it was only a small surprise, and the koruna had no reason to react.

As expected, we see a price decline within sectors connected to oil. There was also a slight decline in food production. On the other hand, prices were higher within car production, the chemical industry and electrical products.

The 6.0% mom price decline in agricultural prices was more interesting. Yoy growth decelerated to 4.1% down from 12.1% in the previous month. Prices of potatoes and vegetables were lower, in particular, but also oleaginous crops, cereals and poultry. The decline in agricultural prices indicates a chance for slower PPI growth in the coming months. This year, food production was the second-biggest driver of industrial producer price inflation. The key driver was energy production.

Prices of private services increased mainly due to the 6.0% price jump in advertising and market research. Yoy price growth reached 2.7% from the previous 2.5%.

For industrial prices, we expect gradual growth deceleration. However, our forecast assumes a decline in oil prices. Developments on the oil market therefore pose a certain risk for our prognosis. Nevertheless, the overall price development in the economy and its forecast does not provide the CNB any room for thoughts of rate cuts.

Investment recommendation: Based on our updated model, we change our recommendation to Buy for Avast stocks with a new increased target price of GBp466 per share. Avast is one of the most important players on the consumer system security market. Its products are used by more than 435 million users around the world. Avast's business model does not correlate much with the economic cycle, so the expected slowdown in the global economy will have a negligible impact on the company's financial performance. The company fulfills its dividend policy with a 40% payout from levered free cash flow, which would represent a total dividend of GBp11.1 per share this year. This represents approximately 2.9% dividend yield in comparison to the current market price.

Investment recommendation: Based on our updated model, we change our recommendation to Buy for Avast stocks with a new increased target price of GBp466 per share. Avast is one of the most important players on the consumer system security market. Its products are used by more than 435 million users around the world. Avast's business model does not correlate much with the economic cycle, so the expected slowdown in the global economy will have a negligible impact on the company's financial performance. The company fulfills its dividend policy with a 40% payout from levered free cash flow, which would represent a total dividend of GBp11.1 per share this year. This represents approximately 2.9% dividend yield in comparison to the current market price.

Company results and expected development: We expect a gradual improvement of the financial results of Avast due to product cross-sell and development of new business opportunities, such as the internet of things or smart home security. The newly concluded strategic cooperation of the subsidiary Jumpshot with Ascential should have a significant share on the future business development. Starting next year, we expect the business to recover in the SME segment, where the restructuring process is currently underway. As a result of above-mentioned factors, there should be strong growth in revenues from $808m in 2018 to $1,151m in 2023.

Company valuation:For assessing the share price, we have used the discounted free cash flow model, where we have discounted the expected cash flows for 2019-23. We estimate the fair value at $5.4 (using the expected FX rate of GBP/USD at the end of 2019 at the level of 1.284, the fair value is GBp424); the target price was set 10% higher at $6.0 (i.e. GBp466) due to the Overweight sectoral recommendation and increased company appeal, where we see potential for faster growth due to new business opportunities and cooperation with Ascential. The target price of GBp466 apiece is 22.6% above the current market price. According to a peer comparison, Avast shares are slightly undervalued as P/E in 2019 is 33.5. On the contrary, this ratio for comparable companies is 53.2.  Similar situation is with EV/EBITDA, where Avast reaches 15.0 whereas its competitors are at the level of 22.2. The opposite situation is with EV/Sales, where Avast equals 7.8 while its competitors reach 5.8.