Dechra have now released their interim results for the year ending 2019.
Revenues increased when compared to the first half of last year due to a £21.9M growth in European revenue and a £15.4M increase in North American Revenue. Cost of sales also increased to give a gross profit £23.2M ahead. Amortisation increased by £777K and there was a £19M growth in the amortisation of acquired intangibles with other expenses increasing by more than £12M. This led to an operating profit £9.3M below last time. There was a £709K increase in forex losses and financial liabilities increased by £2.5M but there was a £2.4M reduction in the movement of deferred consideration. There was a £3.3M charge due to the changes in Dutch and US taxes but other tax charges fell by £1.9M to give a profit for the period of £15.5M, a decline of £11.4M year on year.
When compared to the end point of last year, total assets increased by £28.9M to £1.046BN, driven by a £10.8M growth in inventories, a £10M increase in property, plant and equipment, a £7.2M growth in cash and a £4.7M increase in intangible assets. Total liabilities also increased during the period as a £9.3M decline in deferred tax liabilities and a £2M fall in deferred consideration was more than offset by a £25.4M growth in borrowings, an £8.3M increase in payables and a £7.5M growth in current tax liabilities. The end result was a net tangible asset level of -£210.4M, a deterioration of £5.6M over the past six months.
Before movements in working capital, cash profits increased by £14.6M to £66.7M. There was a cash inflow from working capital but interest payments increased by £2.5M, tax payments were up £1.6M and the non-underlying cash outflow grew by £3.3M to give a net cash from operations of £56.2M, a growth of £17.3M year on year. Of this, £37.2M was spent on acquisitions, £6.7M on intangible assets and £4M on fixed assets which meant that the free cash flow was £7.8M. This did not cover the £18.6M of dividend payments so the group took out a net £16.8M of new loans to give a cash flow of £6.3M and a cash level of £86.9M at the period-end.
The operating profit in the European pharmaceuticals division is £45.8M, a growth of £11.6M year on year driven by acquisitions, although excluding non-core manufacturing, on a like for like basis revenues increased by 4.4%. All major countries delivered above market growth with exceptional performances from Poland, Italy and Spain. Finland underperformed due to temporary regulatory issues, which have now been resolved, as did Denmark due to a loss of FAP business. CAP, Equine and FAP performed to expectations but nutritional sales declined.
The international business declined on a like for like basis as expected due to the group’s inability to release sales in Iran following the imposition of US sanctions, and the phasing of deliveries to Japan.
The operating profit in the North American division was £31.6M, an increase of £6.1M when compared to the first half of last year. The division has continued to benefit from growth following the investment made in increasing the scale of their direct sales force in the previous financial year. This has resulted in increased penetration and market share across all their therapeutic sectors as they are able to make more one to one contact with the vets in practice. Their core growth was enhanced by the absence from the market of a competitor for Zycortal. The competitor is now back in stock.
Overall CAP remains the main driver of growth at 30% with endorcrinology, antibiotic tablets and anaesthesia and analgesia outperforming. Equine growth, at 12%, was in line with expencations and FAP also delivered growth of 5% despite the loss of poultry vaccine sales into Iran. Nutrition was the only disappointment with sales declining by 5%, almost entirely down to a poor performance in France where sales of therapeutic diets are increasingly being made through alternative channels and where the group is disadvantaged due to their vet only focus. Although these sales through vets are declining, they believe that their vet strategy, together with recent quality improvements, will compensate them for this market decline as they target increased market share.
In October the group acquired Caledonian Holdings, an equine vet pharmaceuticals sales and distribution business based in Australia and New Zealand. They paid £4.4M in cash and the acquisition generated goodwill of £800K. It contributed £400K to the operating profit on an underlying basis and if the acquisition had taken place at the start of the year, £500K but the actual operating loss would have been £100K. The acquisition will enhance their Oceania equine portfolio to support their existing products such as Osphos which was recently launched in this market. It will also create an opportunity for the group to increase their market penetration of equine products into the Asian market.
In December the group acquired Venco, a business with a large portfolio of vaccines and other food producing animal products which it sells predominantly in Brazil. They paid £33.2M in cash and the acquisition generated goodwill of £15.3M. If the business had been acquired at the start of the year, it would have contributed £1.8M to operating profits on an underlying basis, but a loss of £3.1M taking into account amortisation and the fair value uplift on inventory.
The most significant individual product registered in the period is a generic Cyclosporine capsule for the US which originally came into the group from the Putney acquisition. In addition, numerous EU registrations have been achieved in multiple countries, originating from the original Dechra programme and also through the AST Farma and Le Vet pipeline. Several international registrations have also been completed, including new products for Australia, New Zealand and Mexico. The pipeline is being strengthened as they identify new development ideas. As planned they have increased their R&D costs by 42%.
Animal Ethics is making good progress on the global registration of Tri-Solfen. The parent company have also received regulatory approval for the protocol to conduct phase two clinical trials for the treatment of venous leg ulceration in humans.
After the period-end, a subsidiary of the group changed the defined benefit scheme operated within the entity to a defined contribution pension scheme. The release of the liability held in respect of the pension scheme will result in an underlying credit to the income statement of £2.7M. The associated tax asset of £600K held in relation to this liability will also be released resulting in a debit.
Going forward, trading across the group has started well in the second half, with particularly strong growth continuing in the US. Material synergies from the AST Farma and Le Vet acquisition will increase in the second half and initial indications are that the Venco acquisition is performing to expectations. Despite uncertainty surrounding Brexit, they remain confident in the outlook for the remainder of the year.
At the current share price the shares are trading on a PE ratio of 75.2 which falls to 30.3 on the full year consensus forecast. After a 30 increase in the interim dividend the shares are yielding 1% which increases to 1.1% on the full year forecast. At the period-end the group had a net debt position of £229.6M compared to £98.8M at the same point of last year.
Overall then this has been a mixed period for the group. Profits declined due to a big hike in acquired intangible amortisation, net tangible assets deteriorated further and were negative, although this is fairly common for this type of business. The operating cash flow did improve but the free cash didn’t cover dividends. The European business was OK, with growth from acquisitions offsetting difficulties in Finland (now resolved), the nutrition business in France and lack of sales to Iran. The North American business performed well due to earlier investment and a missing competitor in the market (now reversed).
So, this is not a bad update by any means but the good news all seems to be priced in to the shares and then some. With a forward PE of 30.3 and yield of 1.1% these shares just look too expensive to me.