Buy Animalcare ahead of sales growth

Animalcare is the UK's largest veterinary medicines provider and also offers companion animal identification services and sells animal welfare products. The company boasts an impressive track record since joining Aim in 2008. Cash flows have been positive every year, its dividend has climbed and, having paid back all its debt in its first three years on the market, it has been building up its cash pile ever since. This financial strength has given the group considerable scope to invest in improving its veterinary medicines business and geographical reach and, after spending three years overhauling its product development activities, Animalcare now looks set to reap the rewards.

The investment in the veterinary medicines division has led to an upswing in new product launches, especially those sold under the 'Animalcare' brand. Historically, the group specialised in developing unbranded veterinary products for third-party companies, but the focus is now on in-house drug launches. In the year to June 2016, the group successfully registered three of its own products, which included the world's first unbranded version of widely used animal sedative acepromazine.

New products are already having a positive impact on sales. In FY2016, the licensed medicine business division increased revenues by 7.7 per cent to £9.2m - far outstripping the 1 per cent growth of the wider veterinary drugs market. This primarily reflects the first full year of sales from products launched in 2015, where revenue increased by £700,000. Management is also looking to add more branded drugs, which offer significantly higher margins. And while profits are likely to be expected to mark time this year - in part due to a one-off benefit from dog tagging regulation in the last financial year - a substantial benefit is forecast for the year to June 2019 when EPS is expected to rise by 17 per cent.

Geographical expansion is the second main strategic initiative expected to propel sales in the coming years. The group recently appointed a head of export development, who has helped lift overseas sales by almost a quarter - both through better promotion of products in existing territories and launch into new territories.

A forward PE ratio of 22 times is not cheap, but considering Animalcare's increased focus on launching new drugs, particularly branded ones, we think that price is justified. Plus, the group has a strong balance sheet driven by excellent cash generation which gives an enterprise value to cash profits ratio based on 2016 forecasts of 15 times, which looks favourable when compared with larger peer Dechra (DPH) on 18 times.