ii view: vets business Dechra upsets the City

Shares for this specialist pharma company are down around 40% year-to-date. We assess prospects. 

Full-year results to 30 June

• Revenue up 13.8% to £681.8 million
• Pre-tax profit up 4.9% to £77.6 million
• A final dividend of 32.89p per share
• Total dividend for the year up 10.8% to 44.89p per share

Chief executive Ian Page said:

"We have continued to progress on all aspects of our strategy; the product development pipeline was strengthened, material acquisitions were completed post year-end and a new subsidiary was established in South Korea as we continue our geographical expansion."

ii round-up:

Veterinary drug and animal products maker Dechra Pharmaceuticals (LSE:DPH) today reported gains in both sales and profit, driven by organic growth across all key markets and therapeutic segments.

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Revenues rose 13.8% to £681.8 million, helping push pre-tax profit almost 5% higher to £77.6 million. However, that missed City forecasts for nearer  £90 million, hindered by rising costs including wage increases. A final dividend of 32.89p per share boosts the total dividend for the year by 10.8% to 44.89p per share. 

Dechra shares fell by more than 10% in UK trading having come into this latest announcement down by around a third year-to-date. Shares for generic medicines maker Hikma Pharmaceuticals (LSE:HIK) are down by a similar amount during 2022, while sector giant and cancer therapy maker AstraZeneca (LSE:AZN) is up by just over a fifth. 

Dechra previously proved something of a pandemic winner as pet ownership increased under Covid lockdowns and owners spent more time and cash on their animals.

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Sales for its core Companion Animal Products (CAP) business, generating around three-quarters of overall revenues, rose 16% year-over-year, aided by its key therapeutic sectors of endocrinology, dermatology, and anaesthesia.

Sales for its Food producing Animal Products (FAP) division, accounting for just over a tenth of overall revenues, slowed to growth of 6%, hindered by avian influenza and African swine fever. 

Accompanying management outlook comments, although flagging economic uncertainty, pointed towards ongoing resilience and growth in the veterinary pharmaceutical market. With the board confident in prospects for the current financial year.

Its next trading update is scheduled for 11 October. 

ii view:

FTSE 100 index member Dechra was started in 1997 and is today a specialist in the development, manufacture, marketing and sales of products used exclusively by vets worldwide. Headquartered in Cheshire, it employs over 1,500 people. Along with medicines and food, its horse or Equine business, accounting for around 7% of overall sales, sells specialist medicines, while its Nutrition business, accounting for around 5% of sales, offers dietary products.   

For investors, a cost-of-living crisis and a highly uncertain economic outlook cannot be overlooked. Costs for Dechra have risen back to more normal levels following operational adjustments under the pandemic and following a wage review. A forecast one-year price earnings (PE) ratio above the 10-year average also suggests the shares are not obviously cheap. 

On the upside, sales continue to grow, with further acquisitions recently being made. Overseas revenues now account for 91.5% of overall sales, up from just over 90% last year, while global animal welfare concerns are likely to carry on growing. The dividend payment, although not greatly attractive at a historical yield of around 1.4%, has been increased consecutively for more than the last 15 years. 

On balance, and while some caution looks sensible given rising costs, the consensus analyst estimate of fair value stands at over £40 per share. That appears to offer longer-term hope, but investors might also prefer some evidence that the business is capable of achieving more aggressive growth targets. 

Positives: 

• Product and geographical diversity
• Progressive dividend policy

Negatives:

• Uncertain economic outlook
• Currency moves can impact

The average rating of stock market analysts:

Buy