Changes in legislation can often be highly disruptive to business, regardless of size. On 19 November, for example, parliament’s approval of an amendment to ban ‘tied houses’ – where pubs are forced to buy beer from certain breweries – instantly led to double-digit share price drops at Enterprise Inns (ETI) and Punch Taverns (PUB). And while next year’s legislative change is unlikely to precipitate such a drastic re-rating, it is a good example of how a well-placed small company might reap significant long-term benefit from amendments to the statute book.
So for the dog-less among us – and perhaps any readers who have not chipped their canines – what exactly is being proposed? Essentially, the legislation seeks to remove an administrative cost burden of £57m a year to the taxpayer and charities in dealing with strays, which the government says is a growing problem. Installing an inactive microchip – around the size of a grain of rice – helps authorities maintain a database of all dog owners, in theory for the good of the dogs and public safety.
According to various figures from the Department for Environment, Food & Rural Affairs (DERA), dog charities and Animalcare, there are at least eight to nine million dogs in the UK, around two thirds of which have been chipped. That leaves a significant number – at least 1.5 million as of next April, according to Animalcare’s estimates – in need of the procedure, which costs up to £25 at the vets. Each year, around 700,000 new dogs are likely to need the chip installed.
York-based Animalcare, which has a market cap of £38.3m, last week said preparation for the deadline in England in April 2016 has so far been slow, but that the company was well-placed to benefit from the gathering momentum. Like-for-like sales in the company’s animal identification division increased just 5 per cent to £1.26m in the six months to 31 December. This is despite an offer from The Dogs Trust to fund the service free of charge for all dog owners. According to chief executive Iain Menneer, this is because the cost of the procedure leaves little margin for the vets themselves, who often lose a significant amount in overheads and lost income when invoicing The Dogs Trust for compensation.
And yet despite a relatively high barrier to entry – Animalcare has also built and manages databases of more than four million registered dogs – Menneer does not want to overplay the chance of a short-term revenue windfall. “There’s likely to be an uptick in chip sales, but we expect to dip down to a plateau after that,” says Menneer. “It’s not necessarily a game-changer, but we’ll potentially see a blip when it does happen.”
“It’s something we know has been coming for two years, and it’ll be on the news agenda for 15 months, but we’ve got to manage expectations, as it’s largely not in our control,” adds the CEO, who expects new microchip manufacturers to enter the market in the next year.
The Aim group currently has a leading 20-30 per cent market share, but already there is one listed major supplier of microchips in French veterinary pharmaceuticals group Virbac (Euronext: VIRP). Elsewhere, small cap veterinary practice firm CVS Group (CVS) and Pets at Home (PETS), which completed its IPO last year and owns the Companion Care and Vets 4 Pets veterinary groups, both offer the microchipping service.
And it is not just companies that make, distribute and install the microchips that could be in a position to benefit, given the campaign is likely to lead to an increase in vet appointments for customers who have previously been off the radar. Given the relatively low cost of the procedure, some of those dog owners who have hitherto avoided an appointment are unlikely to be large spenders, but there are still opportunities for cross-selling to a whole new market. With that in mind, there is every chance FTSE 250 animal pharmaceuticals group Dechra (DPH) will feel some of the benefit of new dog-owner clients, as might Animalcare, which produces a range of other products for dogs.
Whether the new legislation will lead to a bubble in the customer base, or a more sustainable revenue stream is currently anyone's guess. Animalcare and several other groups are watching closely to see if you can in fact teach an old dog owner new tricks.
