Dechra – animal welfare drives shareholder returns

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  • The closures could have indirectly improved pet care
  • “Broader and deeper” geographic footprint through FY2021

Bosses at Dechra Pharmaceuticals (DPH) admit they are unsure why trading volumes in its key pet products (CAP) segment have strengthened since the start of the pandemic. Anecdotal evidence suggests more people are buying pets to ease the sense of isolation caused by the shutdowns, though this contrasts with a recent report finding that vet visits by pet owners in the US have decreased slightly.

Management pointed out that people are spending more time with their furry companions due to the closures and could have simply become more aware of their health needs. Whatever the reason, the veterinary pharmaceutical producer reported a 21% increase in underlying revenue for fiscal 2021, along with a 27.4% increase in adjusted cash profit to $178 million. sterling, the latter resulting in a proportional increase in the full-year dividend.

Sales in the Group’s European and US markets showed similar growth rates and improvements in operating profitability, with R&D expenditure as a proportion of sales unchanged at 5.5%. Amortization of acquired intangibles increased by 8% to £75.2 million, mainly due to new charges related to the acquisitions of Osurnia and Mirataz. The £106.5m deal to acquire the global rights to the Osurnia product portfolio was completed in July 2020 and funded by a prior placement of c. 5% of Dechra’s existing share capital.

The group’s geographical footprint has been widened and deepened through acquisitions, but they have also contributed to an increase in working capital commitments, as inventory has had to increase to match the increase in group size. Cash conversion of underlying operating profit, although down 12.3 percentage points, remains quite healthy at 87.1% and management has indicated that the group has not encountered any problems. with trade receivables.

Net debt as a proportion of shareholder funds increased 10 percentage points year-over-year to 30%, or 1.1 times cash earnings versus a multiple of 0.8 in fiscal 2020, still leaving the group with “optionality” on the mergers and acquisitions front.

Acquisitions made during the period did nothing to hurt profitability, with gross margin up 20 basis points to 56.9% at constant exchange rates. But shares fell on earnings day, possibly because Dechra, contrary to speculation, was not recently elevated to the FTSE 100. Encouraging performance across the board, but forward P/E ratio of 44 times the consensus earnings is a little too rich for our taste. Hold.

Last Seen IC: Hold, 3466p, Feb 18, 2021

DECHRA PHARMACEUTICALS (DPH)
ORDER PRICE: 4 906p MARKET VALUE: £5.31 billion
TO TOUCH: 4900-4910p TOP OF 12 MONTHS: 5 525p LOW: 3056p
DIVIDEND YIELD: 0.8% P/E RATIO: 96
NET ASSET VALUE: 585p* NET DEBT: 32%
Year to June 30 Turnover (£m) Profit before tax (£m) Earnings per share (p) Dividend per share (p)
2017 359 28.6 28.1 21.4
2018 407 28.9 37.2 25.5
2019 182 27.8 30.2 31.6
2020 515 40.9 32.9 34.3
2021 608 74.0 51.3 40.5
% change +18 +81 +56 +18
Ex div: October 28
Payment: November 19
*Includes intangibles of £716m or 661 pence per share
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