ii view: UK pet boom sends Dechra Pharma shares to record high

Growing pet appreciation has made this animal drug maker a Covid winner. Buy, sell or hold?

Trading update from 01 Jan to 07 June

ii round-up:

Veterinary drug and animal products maker Dechra Pharmaceuticals (LSE:DPH) today raised its expectations for full-year revenue, as it continued to benefit from strong market fundamentals and lower costs.

Revenue to the end of June is now expected to come in ahead of the current analyst consensus forecast, with trading likely to be distributed more evenly than previously guided between the first and second halves of the financial year.

Dechra shares rose by around 3% in UK trading, leaving them up by more than 75% since market lows in March 2020. Shares for generic drug specialist Hikma (LSE:HIK) are up by just over 40% during that time and Covid vaccine maker AstraZeneca (LSE:AZN) is up by a little over 15%. 

Increased pet ownership during the pandemic helped to lift first-half sales by just over a fifth to nearly £300 million. Sales for the full year to 30 June had been expected by analysts to materialise at around £588 million, up from last year’s £515 million. 

A further easing of lockdown restrictions and an unwinding of Dechra’s UK pre-Brexit inventory position had also fed into the mix. 

A trading update for the year ending the 30 June is scheduled to be announced on 12 July.  

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 two divisions - 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 35 is not obviously cheap when compared to a 10-year average of around 27 and forward PEs of 22 and 14 at AstraZeneca and GlaxoSmithKline (LSE:GSK) respectively. But trading momentum looks to remain in Dechra’s favour, while the dividend has grown for more than 15 years consecutively. In all, and with global animal welfare concerns only likely to grow, long-term prospects appear to remain firm.   

Positives: 

• Product and geographical diversity
• Progressive dividend policy

Negatives:

• Comparative high valuation
• Currency moves can impact

The average rating of stock market analysts:

Buy