ii view: pandemic winner Dechra Pharma suffers shares slump

Sales, profit and the dividend all up, but a falling share price after these results. We assess prospects. 

Full-year results to 30 June  

• Revenue up 21% to £608 million
• Adjusted operating profit up 29% to £162 million
• Final dividend up 22% to 29.39p per share
• Full year dividend up 18% to 40.50p per share

Chief executive Ian Page said:

"Dechra has continued to outperform a robust market throughout the Covid-19 pandemic affected financial year. As we start the new financial year trading remains strong with the momentum and market penetration seen in the second half of the prior financial year continuing."

ii round-up:

Veterinary drug and products maker Dechra Pharmaceuticals (LSE:DPH) today reported a one-fifth jump in sales as pet owners under pandemic lockdowns spent more time and cash on their animals.

Full-year sales to the end of June hit £608 million, helping adjusted operating profit for the company which is now knocking on the door of the FTSE-100 index to climb by 29% to £162 million.  

Dechra shares fell by more than 8% in UK trading, having more than doubled since pandemic induced market lows in March 2020. Shares for generic drug specialist Hikma Pharmaceuticals (LSE:HIK) are up by around 50% over that time while shares for Covid-19 vaccine maker AstraZeneca (LSE:AZN) are up by around a quarter. 

Dechra 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.

Despite above-average market growth across most of its key products, management pointed to some lack of understanding in the full reasoning for the outperformance. Reports of increased UK dog numbers sits against recent US information suggesting a marginal decline in visits by pet owners to vet practices. 

Growth across its three arenas of companion animal products, food items and equine and nutrition products had been assisted by further recent bolt-on acquisitions. 

Accompanying outlook comments flagged strong trading at the start of the new financial year, with the momentum and market penetration seen in the second half of the prior financial year continuing.

The final dividend was hiked by 22% to 29.39p per share, giving a total for the full year of 40.50p per share, an increase of 18% over the prior year. 

ii view:

Dechra is a specialist in the development, manufacture, marketing and sales of products used exclusively by vets worldwide. Companion animal products generate its biggest slug of sales at around 73% of the overall total, followed by food products at 13%, equine products at 7% and nutrition the balance. 

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

For investors, trading momentum remains in Dechra’s favour, the dividend payment has grown for more than 15 years consecutively, and animal welfare concerns are likely to expand globally over the long term. But the push from the pandemic may now fade, while an estimated price/earnings (PE) ratio of over 40 is not obviously cheap when compared to a 10-year average of around 28 and forward estimated PEs of 22 and 15 at AstraZeneca and GlaxoSmithKline (LSE:GSK) respectively. For now, the shares look to be up with events. 

Positives: 

• Product and geographical diversity
• Progressive dividend policy

Negatives:

• Comparative high valuation
• Currency moves can impact

The average rating of stock market analysts:

Strong hold