Dechra profit downgrade spooks investors

Markets don’t like to feel they’ve been led down the garden path – which might explain why shares in Dechra Pharmaceuticals (DPH) tumbled following the release of its interim results. 

Just six weeks ago, the veterinary products company published a trading update reiterating full-year market expectations for operating profit. Its tune has now changed somewhat, with guidance for the full financial year indicating that full-year pre-tax earnings are likely to be at the lower end of the consensus range. 

In the first half of its 2023 financial year, Dechra’s research and development (R&D) spend almost doubled to £26.5mn, while its sales and administrative expenses were up 25 per cent to £102.5mn. The consequence was an inevitable decline in pre-tax profit. 

Earnings per share also fell due to higher financing costs and dilution as a result of a July fundraising. Management indicated that its recent profit downgrade could be partially blamed on destocking by US wholesalers. 

According to analysts at broker Numis, a trend towards medical destocking can be seen across the country’s veterinary sector. “It is unclear if this represents a permanent step change to take one to two weeks out of the channel to run more leanly,” they wrote. 

Wholesalers typically hold four to six weeks of stock – and Numis analysts said it’s difficult to run efficiently on anything less than four weeks “without dropping service levels to vets”.

Bulls would say that the reaction to Dechra’s interims was perhaps overblown given the robust condition of the wider animal health market. The company’s companion animal products (CAP) division grew 5.2 per cent in the six months to the end of last year – with its US performance standing out as particularly strong.

Liberum analysts noted some “softness in the food-producing animal market”, but they expect headwinds to ease in the second half of the financial year. “In the US, we do continue to see anecdotal evidence of higher pet abandonments and fewer [vet] visits,” they wrote. “But evidence indicates that revenue per veterinary visit continues to grow.”

Dechra currently trades at around 20 times forward earnings for FY2024, which is a significant reduction from the 28 times it was trading at last July. For believers in the underlying strength of veterinary medicine, this could be an ideal time to gain exposure to the sector. 

Several of the factors that dogged the company in the first half could be righted by the close of the second half. For this reason, we’ll keep the company on a (cautious) buy. 

Last IC view: Hold, 3,180p, 5 September 2022