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Genus outlook dims on pork prices

Shares in the animal genetics specialist headed south on a dip in pork prices
September 9, 2021
  • Pig prices soften as Chinese imports pull back
  • Encouraging clinical progress on PRRS virus

Regarding investments, long-term trends trump cyclical effects every time, or at least they should. With Genus (GNS), investors may point to the positive effects over the rebuilding of global porcine herds in the wake of African Swine Fever, or even the decision to hike the annual dividend by 10 per cent. But the long-term drivers of the stock are based on the agricultural industry reacting to tighter regulations regarding environmental impacts and animal welfare, not to mention the steady increase in animal protein consumption in many emerging markets.

Genus, a specialist in gene-based animal therapies, continues to build profits and increase market penetration in high-growth markets such as China, Brazil and Russia. Indeed, royalty revenue for porcine genetics in China more than doubled through to the June year-end, a partial reflection of recovering herd numbers, although management said the People’s Republic is expanding and consolidating this segment of the livestock market at an unprecedented rate.

The group saw adjusted operating profits move up by a third to £76.9m at constant currencies. However, statutory numbers were held in check by a £6.3m adverse forex translation due to weakness in Latin American currencies. Free cash flow increased by 7 per cent year on year to £37.5m, aided by a cash conversion rate that remains well above 100 per cent.

The top line for the group’s bovine genetics business, ABS, rose by 13 per cent on the back of record volume growth, reflecting the increased utilisation of beef genetics in dairy herds. Management was also keen to point out the positive strides being made with the Porcine Reproductive Respiratory Syndrome (PRRS) virus resistance development programme, citing two successful disease trials and “a defined path to regulatory approval”.

Despite this improved showing, shares in the group were marked down heavily on results day, as it warned of “a short-term headwind in FY22”, primarily for its porcine genetics business in China. Consequently, management now anticipates that growth will be lower than its medium-term goal in the current year, “before increasing again in FY23”.

Put simply: pig prices have moved against Genus. China has reduced its import demand as domestic herds have increased, while feed prices remain high, imperilling financial viability down on the farm. Over time, wider adoption of royalty arrangements will reduce the group’s exposure to livestock price variations and it is steadily embedding operations in the world’s key growth markets. Liberum gives an EPS estimate of 109.4p for FY22, rising to 130.2 in FY23, but there are adequate growth assumptions baked into a forward rating of 48 times forecast earnings. Hold.  

GENUS (GNS)     
ORD PRICE:5,284pMARKET VALUE:£ 3.48bn
TOUCH:5,270-5,290p12-MONTH HIGH:6,310pLOW: 3,360p
DIVIDEND YIELD:0.6%PE RATIO:73
NET ASSET VALUE:757p*NET DEBT:21%
Year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201745940.753.823.6
20184707.8069.726.0
20194899.9012.427.7
2020 (restated)55146.354.429.1
202157455.872.632.0
% change+4+21+33+10
Ex-div:18 Nov   
Payment:10 Dec   
*Includes intangible assets of £158m or 240p a share