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Dechra's high price defence

RESULTS: Dechra's operational problems are mainly related to its acquisition strategy and should correct themselves during the year
February 26, 2013

Dechra Pharmaceuticals (DPH) spent most of the first half integrating its €135m (£110m) Eurovet acquisition. That should ultimately mean cost savings totalling £4m through the rationalisation of different manufacturing sites. However, Dechra's performance will be weighted to the second half of the year, as it deals with a variety of operational issues in its main business divisions that have arisen from its acquisition strategy.

IC TIP: Hold at 692p

When the effect of acquisitions is excluded, revenues at Dechra's pharmaceutical products division grew by an underlying 8 per cent rate in constant currencies, held back partly by destocking in France and Germany as suppliers were changed. The company also incurred an additional £1.2m of costs to fund higher production of Dechra's core product, Vetoryl, to ensure its supply during the integration process. Management said the destocking effect should reverse in the second half.

On a related issue, Dechra could see complications over the widespread use of antibiotics on farms in the EU. These products are under review in many EU markets because of fears of anti-microbial resistance, although Dechra still expects to see growth in the segment outside of the Benelux countries. The company's biggest division, Veterinary Services, saw revenues rise by over 5 per cent to £167m. However, management warned that January's poor weather has had an effect on footfall into veterinary surgeries, although this should not affect the division's recovery.

Broker Investec Securities forecasts full-year pre-tax profits of £46.1m and EPS of 40.5p (from £33.9m and 33.5p in 2012).

DECHRA PHARMACEUTICALS (DPH)

ORD PRICE:687pMARKET VALUE:£598m
TOUCH:682-692p12-MONTH HIGH:694pLOW: 417p
DIVIDEND YIELD:1.9%PE RATIO:43
NET ASSET VALUE:184p*NET DEBT:64%

Half-year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2011**2098.99.273.77
201225211.59.914.34
% change+21+29+7+15

Ex-div: 13 Mar

Payment: 9 Apr

*Includes intangible assets of £223m, or 256p a share

**Earnings and dividends restated to reflect rights issue