Cash flow dries up at Animalcare

It has been a mixed six months for veterinary pharma group Animalcare (ANCR). On the one hand, its higher-margin strategy is bearing fruit and demand for its medicines have proved resilient. On the other, cash conversion has taken a beating and operating profits are under pressure. 

After a period of “exceptional growth” in 2021 – when the lifting of Covid restrictions caused sales to surge – demand for Animalcare’s products has normalised. However, turnover is only down by 2 per cent year on year, suggesting demand is still strong. Meanwhile, its gross profit margin has risen by over a percentage point to 56 per cent, following a decision to focus on larger, higher-margin brands. 

Now for the bad news. Underlying operating profit has fallen by 8 per cent year on year, as a result of higher staff costs and investment in a research and development (R&D) programme. Management also reported inventory and logistics price increases, and remains “alert to the accelerating inflationary pressures impacting our overall cost base in the second half and into 2023”.

Net cash flow from operations plunged from £6.2mn to £1.4mn year on year, meaning underlying cash conversion languished at 23 per cent in the first half. According to management, this reflects higher sales towards the end of the period (Trade receivables almost doubled to £13.8mn). Animalcare has also had to build up inventories after experiencing supply problems, but expects cash conversion for the full year to settle at around 70 per cent. 

Adjusted for higher R&D investment, Animalcare expects its full-year earnings to meet market expectations. However, analysts at Panmure Gordon have lowered their revenue and underlying Ebitda forecasts slightly, to £75.1mn and £13.3mn, respectively. Regardless, lumpy cash flow and rising costs remain a concern. Back to hold. 

Last IC View: Buy, 340p, 29 Mar 2022