Pork prices weighing on profits at Genus

After a prolonged slump in prices, conditions in China’s live pig market appear to be rebounding – much to the relief of Hampshire-based animal genetics group Genus (GNS). It provides farmers with genetic tools that enable them to breed livestock, which means demand for its products fluctuates in line with meat and dairy prices.

In the year to 30 June, China’s restrictive Covid-19 lockdown measures collided with structural oversupply issues to send the price of live pigs plummeting. This ultimately contributed to a reduction in statutory profit before tax of 13 per cent at Genus, which operates through three segments: porcine (PIC), bovine (ABS) and R&D (research and development).

The company’s full-year results noted that the live pig price in China – the world’s largest pork market – remained below the cost of production for much of the year and has only shown signs of recovery since June.

“Over the summer, China’s live pig prices have risen above Rmb21 (£2.50) per kilogramme (kg), improving confidence that the country’s porcine industry is on the path to recovery and profitability,” said Genus’s chief executive, Stephen Wilson. “Industry expectations are that prices will continue to exceed Rmb20 per kg for the remainder of 2022, although there could still be some further volatility.”

All told, revenue in the company’s PIC division declined by 5 per cent (3 per cent in actual currency) as a result of the challenges in China. In the rest of the world, however, PIC’s adjusted operating profit grew by 11 per cent, thanks in part to the capture of greater market share in North America. 

Meanwhile, revenue in Genus’ ABS division was up 7 per cent on a constant currency basis, although it noted bovine producers faced a difficult second half of the year due to increased input costs and the war in Ukraine. Feed, fuel, energy and labour were all more expensive for dairy producers, thereby impacting their profitability. 

Looking forward, the group is working on a gene editing programme and plans to submit its technology for US Food and Drug Administration approval by the end of next year. Analysts at Peel Hunt are bullish on the impact of the programme, writing in a recent note that there is “effectively nothing in the [current] valuation for the significant potential in gene editing”. 

Analysts at investment bank Stifel are more cautious, stating that the rise in pig prices in China is “encouraging” but they “await clearer signs that this is maintained”. Given that it could be years until a successful gene editing programme might impact the group’s bottom line, we’re inclined to agree. Hold. 

Last IC View: Buy, 5,005p, Dec 30, 2021