Back this highly defensive petcare small cap

However, there’s one aspect of petcare that owners have seemed more reluctant to embrace: dental hygiene. Yes, it’s widely recommended that you break out a toothbrush and get up close and personal with your canine’s canines on a daily basis. 

Puns aside, dental disease can be seriously detrimental to the health of dogs and cats – and treating a severe case adds up fast. Until recently, the only preventative option was regular brushing, which many animals simply won’t tolerate. Fortunately, there are now a number of products available – such as teeth-cleaning chews – that are more acceptable to pets and people alike. 

Aim-traded Animalcare (ANCR) sells a number of oral hygiene products, including a spray and a water additive, as part of its Plaqtiv+ range. Launched in the second quarter of FY2022, the brand has played an important role in the company’s recent revenue progress. In its last financial year, sales in its companion animal division grew 4 per cent to £52.2mn. Just under £2mn of this was attributable to new products, with Plaqtiv+ contributing around half of this total. Given that few pet insurance policies include dental coverage as standard, it’s not surprising that the products have proved popular. 

Like many other companies in the veterinary sector, Animalcare saw significant interest in its shares during the pandemic, when lockdown restrictions led to a surge in pet ownership. The stock reached a five-year high of 420p in October 2021 before entering into a period of decline.

“The veterinary services and veterinary pharma market has seen quite a bit of turbulence in the post-Covid era,” said Dr Mike Mitchell, an analyst at Panmure Gordon. “There has been a period of trying to understand what the new normal would look like.”

Unlike CVS Group (CVSG) and Pets at Home (PETS), which operate veterinary practices, Animalcare is not likely to be impacted by ongoing scrutiny from the competition regulator. The Competition and Markets Authority is currently planning a formal investigation into the veterinary market following an initial review last year. In this preliminary stage, the watchdog identified a number of concerns, including a lack of price transparency and high levels of consolidation in terms of practice ownership. 

The probe has spooked investors, with shares in CVS falling more than 40 per cent in the year to date (a cyber attack in March didn't help). Pets at Home is down just 8 per cent in the same period, probably because it operates a chain of pet supply shops as well as veterinary surgeries. While the exact scale and scope of regulatory action remains unknown, it doesn’t look as though drugmakers will be caught in the crosshairs. The watchdog has said it could ultimately impose maximum pet prescription fees, but this looks to be a means of cracking down on mark-ups by vet chains.

“The CMA is not investigating drug manufacturers and [Animalcare] sells both online and through the veterinary practices,” explained Stifel analyst Max Herrmann. “The pricing is very different online than it is through veterinary practices, [but] that’s not because of the cost of the drugs.”

M&A potential

So while investors have been turning bearish on the likes of CVS, momentum has been building behind Animalcare. The stock saw a significant uplift in late February after the company said it disposed of its majority stake in microchipping group Identicare. The sale brought in nearly £25mn in cash, which took its net cash position to £27mn by February.

Management has made it clear that strategic acquisitions are part of the group’s longer-term growth plans. Disposing of non-core assets is an effective way of funding these future purchases – whatever they may be. Earlier this month, Animalcare also announced the sale of its minority stake in STEM Animal Health, a joint venture with Canada’s Kane Biotech, for $5.4mn (£4.4mn). The buyer was none other than Dechra Pharmaceuticals, which delisted from the London market in January after it was acquired by private equity group EQT.

With FY2023 turnover of £762mn, Dechra remains the UK’s largest veterinary pharmaceutical group in revenue terms. Its departure from the London Stock Exchange leaves only a handful of much smaller players accessible to retail investors, including Animalcare and Eco Animal Health (EAH). For much of its listed life, Dechra was an understated success: its shares tripled over the five years to September 2020 as it expanded overseas via M&A. Mitchell suggests this is a model Animalcare could learn from.

“The Dechra growth trajectory was always one of combining organic and acquisitive growth,” he explained. “It built its business through acquiring either products or businesses.”

In the recent past, Animalcare has mainly focused on growing its larger and more profitable brands. This cohort includes the once-weekly painkiller Daxocox, designed to manage canine osteoarthritis, which recorded double-digit growth across the group’s direct sales territories last year.

Management credits its emphasis on the core business with a 1.5 per cent improvement in its gross margins across FY2023. Although companion animals make up the majority of Animalcare’s sales, it also has equine and 'production' animal (ie livestock) divisions. Sales of its horse-focused products rose by 11 per cent to £6.3mn last year, primarily because it took over UK distribution of Danilon, its bestselling equine painkiller. The production animal side of things is somewhat less dynamic, with revenue flat year on year.

As it stands, Stifel’s Max Herrmann says Animalcare is one of the lowest-rated veterinary pharmaceutical groups in Europe, with its shares trading on an enterprise value to Ebitda ratio of nine times for FY2024, based on his estimates. This constitutes a discount of around 25 per cent compared with its peer group. Its current valuation is probably a function of its small size and market share, as well as its limited geographic range. Crucially, the group has no US presence, but it does operate in seven European countries and exports to approximately 40 countries worldwide. This certainly appears to be an adequate foundation. 

“It has got too much infrastructure for the sales base, so that gives it the opportunity to expand margins as it adds bolt-on acquisitions to that sales base,” Herrmann said. “The perfect product would be something that adds to the top line, and utilises the salesforce and infrastructure without increased costs.”

Top-line growth could struggle this year in the absence of the Identicare business, but this shouldn’t sink the shares too badly given the health of the balance sheet. People will almost certainly continue to prioritise pet health in their household budgets, so continued growth in the veterinary market seems very likely. Animalcare's next moves will determine the portion of the market it ultimately captures.