Interactive Investor

ii view: share slump at takeover target Dechra Pharmaceuticals

22nd May 2023 13:12

by Keith Bowman from interactive investor

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The ups and downs of the pandemic followed by a takeover approach and now a downbeat trading update. We assess prospects. 

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Full-year trading update to 30 June

ii round-up:

Veterinary drug and animal products maker and takeover target Dechra Pharmaceuticals (LSE:DPH) today lowered its full-year profit expectation following volatile and challenging trading between January and April. 

Adjusted operating profit for the financial year to June is now expected to be below the £186 million Dechra's management guided to at interim results late February. In mid-April, Swedish private equity firm EQT detailed a possible £4.6 billion takeover offer for Dechra worth 4,070p per share. 

The FTSE 250 pharma group fell more than 10% in UK trading having topped 3,800p in April following the announcement of a potential takeover offer. Decha shares climbed strongly during 2020 and 2021 during the pandemic as households bought new pets, but they halved in 2022 as the pets boom wore off. 

Decha management blamed demand weakness over recent months on de-stocking by wholesalers selling its products in both the US and UK. Economic headwinds  also impacted European demand.

However, there have been signs of recovery for both the US and UK markets, with independent US data pointing towards growth of 11% year-over-year for the January to April period. 

More broadly, Dechra remains confident of medium to longer term growth, underpinned by structural industry growth and given its own development pipeline of new products and a strong balance sheet. 

Cheshire headquartered Dechra is continuing takeover discussions with EQT, with the private equity concern given until 5pm on 2 June to either make a firm offer or walk away. As such, Dechra remains in an offer period as defined by the City Code and is restricted in providing further guidance for now.

ii view:

Started in 1997, Dechra is today a specialist in the development, manufacture, marketing, and sale of products used exclusively by vets worldwide. Operating across seven manufacturing plants its products including pain killers, anaesthetics and nutritional supplements are distributed across more than 60 countries. The US generates its biggest slug of sales at close to two-fifths, followed by the UK and Germany each at close to a tenth and the rest of Europe at almost a third. 

For investors, recent weakness in trading cannot be overlooked. Costs for businesses generally remain elevated, high economic outlook uncertainty persists, while potential for suitor EQT to either walk away from any takeover, or lower their offer price, is a real risk. 

More favourably, at least takeover discussions with EQT are ongoing and, if talks fail, Dechra still  boasts defensive qualities given demand for animal medical drugs no matter what the economic backdrop. Bolt-on acquisitions have previously aided growth, new drug development continues, while a record of more than 15 years of consecutive dividend growth should not be overlooked despite a historic yield of less than 1.5%. 

Dechra has obvious qualities, but investing in the business at this stage is all about the takeover situation. At 3,280p currently, the shares trade at a discount of almost 20% to the potential offer price, which could be an opportunity. However, if EQT decides not to launch a formal bid or changes the terms of any offer, it's possible the the shares could fall.

Positives: 

  • Product and geographical diversity
  • Progressive dividend policy

Negatives:

  • Uncertain economic outlook
  • Currency moves can impact

The average rating of stock market analysts:

Buy

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