ii view: Dechra Pharmaceuticals benefits from pandemic pet boom

An 8% increase in the interim dividend adds to a solid track record. We assess prospects. 

First-half results to 31 December 2020  

• Revenue up 21% to £299.8 million
• Operating profit up 73% to £40 million
• Underlying operating profit growth was 32%
• Dividend up 8% to 11.11p per share

Chief executive Ian Page said:

"Despite 2020 being one of the most challenging years in Dechra's history, it is pleasing to report that the calendar year ended strongly resulting in an excellent performance in the first half of our financial year."

ii round-up:

Veterinary drug and animal products maker Dechra Pharmaceuticals (LSE:DPH) today reported gains in both sales and profits as it raised its interim dividend by 8% to 11.11p per share.

Buoyed by pet ownership and welfare under the pandemic and acquisitions, group sales rose by more than a fifth to £299.8 million. Sales for its largest category, companion animal products, rose by 27% to £219 million. 

Dechra shares drifted marginally lower in UK trading, leaving them up around 30% over the last year. 

Acquisitions added just over £13 million to sales over the period. Food Animal products, accounting for around 12% of total sales, rose by just over 10%. Its Solustab range of water-soluble powders continued to outperform. Growth in Belgium and Spain proved particularly strong.

Despite the global pandemic, most of the world’s veterinary practices had continued to operate. All of Dechra’s manufacturing, logistics and frontline laboratories stayed open.

Sales of its equine product category, accounting for just under 8% of overall turnover, rose by 16.8% growth. Nutrition, generating around 5% of group turnover, improved by 10.7%. Growth in its Specific branded range of pet diet products contributed. 

Drug development included progress on a new canine sedative for the US and the approval of its poultry vaccine range, Avishield, in South Africa.

Accompanying management outlook expectations pointed to a continuation of favourable market conditions and for its recent acquisitions to perform well.

ii view:

Dechra is a specialist in the development, manufacture, marketing and sale of products used by vets worldwide. It believes its business is unique as the majority of its products are used to treat medical conditions for which there is no other effective solution or have a clinical or dosing advantage over competitor products.

Geographically, it operates through the two divisions of the EU and North America, with the EU generating around two-thirds of sales and North America the balance. Operating profit is generated on a similar basis. Its portfolio of products focuses on prescription only medicines. It also continues to expand internationally with targeted acquisitions. 

For investors, an estimated price/earnings (PE) ratio of over 30 does not scream cheap when compared to a 10-year average of around 26 and forward estimated PEs of 20 and 12 at AstraZeneca (LSE:AZN) and GlaxoSmithKline (LSE:GSK) respectively. The shares are also trading close to the current consensus analyst estimate of fair value of £35.98. But this latest update has seen both sales and profit increase, with the dividend now growing by more than 15 years consecutively. In all, long-term investor support for Dechra appears to remain justified.  

Positives: 

• Product and geographical diversity
• Progressive dividend policy

Negatives:

• Comparative high valuation
• Currency moves can impact

The average rating of stock market analysts:

Buy