Dechra – animal welfare boosts shareholder returns

Bosses at Dechra Pharmaceuticals (DPH) admit that they’re not fully sure why trading volumes in its key Companion Animal Products (CAP) segment have strengthened since the start of the pandemic. Anecdotal evidence suggests that more people have been buying pets to alleviate the sense of isolation brought about by the lockdowns, though that stands in contrast to a recent report revealing that visits to the vet by pet owners in the US have declined marginally.

Management did point out that people are spending more time with their furry companions due to the lockdowns, and could have simply become more aware of their health needs. Whatever the reason, the veterinary pharmaceuticals producer delivered a 21 per cent increase in underlying revenue for FY2021, along with a 27.4 per cent increase in adjusted cash profits to £178m, the latter giving rise to a commensurate increase in the full-year dividend.

Sales in the group’s European and US markets exhibited similar rates of growth and improvements in operating profitability, with R&D expenses as a proportion of sales unchanged at 5.5 per cent. Amortisation of acquired intangibles crept up by 8 per cent to £75.2m, largely attributable to new charges relating to the Osurnia and Mirataz acquisitions. The £106.5m deal to acquire the worldwide rights of the Osurnia product portfolio was completed in July 2020 and funded by an earlier placing amounting to c. 5 per cent of Dechra’s existing share capital.

The group’s geographical footprint was expanded and deepened due to the acquisitions, but they also contributed to an increase in working capital commitments, as inventories had to rise to match the increase in group scale. The cash conversion rate of underlying operating profit, though down by 12.3 percentage points, remains healthy enough at 87.1 per cent and management has indicated that the group has experienced no problems with trade receivables.

Net debt as a proportion of shareholder funds increased by 10 percentage points year on year to 30 per cent, or 1.1 times cash profits against a multiple of 0.8 in FY2020, still leaving the group with ‘optionality’ on the M&A front.

Acquisitions completed through the period have done nothing to dent profitability, with the gross margin up 20-basis points to 56.9 per cent at constant currencies. But the shares pulled back on results day, possibly because Dechra, contrary to speculation, was not recently elevated to the ranks of the FTSE 100. An encouraging performance across the board, but a forward P/E ratio of 44 times consensus earnings is a bit too rich for our tastes. Hold.

Last IC View: Hold, 3,466p, 18 Feb 2021