Dechra dives despite solid profits growth

3rd Sep 2018 07:26

(Sharecast News) - Veterinary pharmaceutical business Dechra Pharmaceuticals issued a solid set of preliminary results on Monday, but a warning about the fast past of change in the industry saw many investors take profits.The FTSE 250 firm reported revenue growth of 13.9% to £407.1m for the year ended 30 June, with underlying operating profit growing 24.0% to £99.2m as underlying EBIT margins expanded 200 basis points to 24.4%.Underlying diluted earnings per share were ahead 20.9% to 76.45p.The Dechra board declared a full-year dividend of 25.5p.On the operational front, Dechra highlighted the acquisition of AST Farma and Le Vet in the Netherlands and the European Union, and RxVet in New Zealand.It said it outperformed in the majority of its countries and therapeutic sectors, while making "several" new global product registrations, with new opportunities secured."Dechra has delivered another successful year from both a financial and strategic perspective," said chief executive officer Ian Page.But the company acknowledged that the veterinary market was "seeing faster change than at any time in its history" with European and US practice corporate consolidation increasing and veterinary distributors increasingly marketing their own generic products, often in conflict with their core historic suppliers.A recent "significant move" was seen as a leading US rival taking a small presence in the UK and a significant presence in mainland Europe.Dechra management said they believed the business was "well positioned to support the needs of the larger veterinary practice groups alongside independent practices and that we also have the flexibility to respond quickly to any ongoing changes within the distribution network".Dechra shares, having scampered up more than five-fold in the last six years, fell 15% to 2,650p, taking them back to where they were around six months ago.While increased consolidation could see increased buying power of distributors, analysts at Jefferies felt Dechra's "high value, innovative portfolio means it is less exposed to these changes and there is value in increasing volumes through consolidated distributors".RBC Capital Markets noted that results were in line with consensus, "representing a good year" but missed its top-end expectations.Within the outlook statement there were a "number of one-off and underlying points" that led RBC analysts to believe consensus EPS forecasts in outer years could come down circa 3-5% for the next financial year and circa 6-8% in 2020."From the statement we understand that management have invested heavily in the US business, which delivered a strong top line (+18.2% growth), but this top line growth was slightly weaker than we had as management withdrew products in Mexico and the top-line growth may now slow as key products reach peak share and risks grow."While some of the risks are uncontrollable, such as Brexit and Iran sanctions, RBC see underlying/growing risks as well detailed in the statement and that, although the fundamental appeal of Dechra "hasn't changed materially", the shares were trading at around 36 times next year's EPS."We had been concerned that the shares were overheating and that investors were not factoring in potential risks (customer consolidation and distributor copycat/generic launches, in particular), so we think they could come under pressure. We look to see the scale of share price move to see if this presents an opportunity."It was a "mixed update" said Russ Mould, investment director at broker AJ Bell, that showed "the dangers of a high valuation colliding with less than positive news" after a the strong dynamics behind the animal drug market helped underpin a multi-year advance in its shares."On the face of it, Dechra's full year results still look good with underlying profit, excluding the impact of accounting adjustments on some acquisitions, up more than 20%," he said."What may be concerning the market are references to contingency plans for a 'hard Brexit' and the fact an increasing number of distributors are focusing on the sale and marketing of their own products. These factors could prevent the company churning out the same stellar numbers as it has done historically."