Porcine problems constrain profits at Genus

By all accounts, animal genetics group Genus (GNS) has had a challenging year for reasons well beyond its control. The global spread of African swine fever, a deadly virus, has led to weakness in several key pork-consuming markets – most notably China. As a result, the company’s shares have fallen almost 30 per cent since January.

There were some signs of recovery in early March, when pig prices rose to almost 16 renminbi (RMB) per kilogram before immediately falling again. The average pig price in the second half was 14.7 RMB per kilogram – which put serious pressure on producer margins. Despite these tricky conditions, Genus’s porcine division (known as PIC) managed to grow its operating profit by 11 per cent year-on-year.

The picture was similarly mixed in the group’s bovine division (ABS) where adjusted operating profit increased 5 per cent – even as high inventory and weak demand led to reduced milk prices in China and Brazil. Global beef production was largely stable across Genus’s 2023 financial year, with dips in the US and Europe offset by rises elsewhere.

Investors also had plenty of warning about the problems in the company's pork business, with management downgrading profit expectations in a May trading update. These factors, combined with greater R&D spending and higher interest costs, ultimately constrained profit growth in the 2023 financial year. 

Management has said it expects headwinds in 2024 as the pound strengthens against certain key currencies. However, Stifel analysts also foresee a recovery in China, which they said “should drive strong growth for the year” despite FX woes and the rising cost of debt. 

There are also a handful of potential catalysts that could spur share price growth in the near-term – including an FDA ruling on gene-edited pigs. Genus has been working on breeding animals resistant to the PRRSv virus, another common and costly infectious disease. The FDA’s approval is expected to be handed down before the end of the current calendar year.

“The [PRRSv] programme represents, in our view, a step-change in pig breeding technology and a substantial commercial opportunity,” Investec analysts wrote in a note. FactSet broker consensus puts Genus’s shares at 22 times forward earnings for 2024, which looks a bit steep considering the macro challenges facing the business.

It could also be said that the current pessimism around the company is excessive. Shares fell 7 per cent on the day of its results announcement – investors had been pre-warned about the troubles in the pork business, but guidance detailing currency headwinds as a result of sterling's recent strength hit sentiment further. That factor doesn't reflect the underlying business, however; we remain at a cautious buy.

Last IC view: Buy, 3,000p, 23 February 2023