A poorly pig can be disastrous for a farm, causing disruption to the herd, and loss of revenue and profits. That is why farmers are willing to splash out on pigs that have a high resistance to disease. In fact, by tinkering with genetics, scientists can create super farm animals which put on weight faster, are less likely to become ill and are more fertile. Genus (GNS) has been supplying such animals to farmers since the 1960s and long-term growth prospects look strong as high-growth countries, such as China, switch food production from small-scale farms to large commercial operations. Originally known as the Pig Improvement Company, Genus has expanded into the beef and dairy industries and now sells semen, embryos and live young to more than 50,000 farmers in nearly 100 countries.
Long-term growth trends
Launch of semen sexing technology
Margin improvements
Broker upgrades
High research and development costs
Milk and pig price volatility
A weak global agriculture market has been tough on Genus in the past few years. But still, the company has managed to grow volumes and revenue in six of the past seven years, pay a gradually increasing dividend and invest in new technologies. Now, with an uptick in the price of milk and pork giving farmers a greater capacity to invest in their herds, the market is turning in Genus’ favour. This should help strong revenue and profit growth in the next few years and underpin share price rises.
Furthermore, Genus has recently launched its new semen sexing technology – Sexcel – which ensures 90 per cent of calves are female. This is beneficial to dairy farmers, which routinely slaughter male calves. The potential for this product is particularly high in India where, for religious reasons, the slaughter of cattle is banned in many states. Given the country’s enormous dairy industry and problems with too many unproductive male cows, Genus anticipates strong sales here.
The total sexing market is valued at roughly $220m and is currently dominated by US group Sexing Technologies (ST). Genus believes its product is more effective and better for animal welfare than that of the incumbent. Genus historically sold more than 1m doses of ST’s product to its own customers and has paid a royalty of $13 per dose. Genus will still be using two ST patents, but royalty payments per dose will plummet to $1.75 once Genus has worked through all its existing stock and begins selling its own technology to its large customer base.
Over time this will spark profit improvements of between £3m and £5m annually, although ongoing research and development expenditure is likely to stunt this for another year. This should significantly help management in its aim to improve margins at the bovine division, which currently accounts for 44 per cent of turnover, but only 20 per cent of profit. Management believes the 11 per cent bovine margin could ultimately get a lot closer to the 35 per cent achieved by the porcine business.
| GENUS (GNS) | ||||
| ORD PRICE: | 2,413p | MARKET VALUE: | £1.48bn | |
| TOUCH: | 2408-2413p | 12-MONTH HIGH: | 2,444p | 1,652p |
| FWD DIVIDEND YIELD: | 1.2% | FWD PE RATIO: | 30 | |
| NET ASSET VALUE: | 649p* | NET DEBT: | 28% | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 399 | 48.9 | 54.5 | 19.5 |
| 2016 | 388 | 51.9 | 65.0 | 21.4 |
| 2017 | 456 | 58.8 | 70.8 | 23.6 |
| 2018** | 475 | 63.0 | 74.1 | 25.8 |
| 2019** | 500 | 69.5 | 80.0 | 28.3 |
| % change | +5 | +10 | +8 | +10 |
| Normal market size: | 300 | |||
| Matched bargain trading | ||||
| Beta: | 0.79 | |||
| *Includes £193m of intangible assets, or 314p a share | ||||
| **Broker Peel Hunt forecasts, adjusted PTP and EPS | ||||
