Turkey of the week overbought pet pharma – MoneyWeek

Stoke-on-Trent-basedDechraisforecasttodeliverturnoverofaround£350mthisyearfromitstwomainunits。

Thehighermargin(20%)pharmaceuticalsunitdevelopsitsownprescriptionmedicines(eg,anti-inflammatories)fordogs,catsandhorses,andlicensesinotheranimaltreatments(suchasdietfoodandshampoos)fromthirdparties。

AnimportantpointtomakeintermsofintellectualpropertyisthatDechratendsnottoowntheunderlyingpatentasitdevelopsmostofitsdrugsfromsciencethathasalreadybeendiscovered。

Thiscutsinvestmentonresearch,butmeansthereisagreaterthreatofcopycattreatments。

Theseconddivisionisservices,whichaccountsforabout80%ofrevenuesbutonlygenerates4%profitmargins。

Itisessentiallyafull-linewholesalersupplyingveterinarypracticeswithmorethan14,000products,includingmedicines,consumablesandaccessories。

Itisagoodcashgeneratorandrelativelydefensiveinnature–theUKpetmarketisestimatedtobewortharound£10bnayearandgrowingata5%-10%annualclip。

Butinvestorsshouldnotbelulledintoafalsesenseofsecurity。

Therehavebeentimeswhengrowthhasdipped,suchasduringtheBSEandfoot-and-mouthscares。

Andinharsherdays,evenpetownerscutbackonitemssuchasnewsqueakytoysforFidotochew。

Withthisinmind,whatdoIthinkDechraisworthonasum-of-the-partsbasis?

Iwouldputthemoretechnology-heavypharmaceuticalunitona14-timesearningsbeforeinterestandtaxmultiple,generatingafairvalueofaround£150m。

Iwouldrateservicesateighttimesoperatingprofits,or£85m。

Soafterdeductingnetdebtof£27mandcentralcostsof£2。

3mayear,thewholeshebangiswortharound280pashare–30%lessthantoday。

SowhyhastheCitygotitsowrong?

Probablyforthreemainreasons。

Firstly,Dechrahasascarcityvaluesinceitisoneoftheonlylistedvetstocks。

Next,itisseenasrecessionproofandsohasbecomeanexpensive‘safehaven’ascautiousinvestorshavebiduptheprice。

Finally,manyanalystsareverybullishonitscaninetreatmentforCushing’sdisease–Vetoryl–andreckonitwillbecomeablockbusterafteritsrecentlaunchinAmerica。

Thisrose-tintedviewmayberight,butIsuspectrealitywillberatherdifferent。

Atmorethan17timesforwardearnings,thesharesappearpricedtoperfection,soanyminordisappointmentswillcomeasabigshock。

AndevenifVetoryldoeshititsstretchingtargets,thenI’msurerivalproductswillbelaunchedquicklythereafter。

Alltold,althoughDechraisaqualitybusinessoperatinginanattractivesector,Ibelievethestockisoverboughtandnowvulnerabletoabriskhair-cut。

Investorsshouldalsonotethatthecompanyhastorefinancearound£21mofloanswithinthenextsixmonths–notastraight-forwardtask,giventhedirestateofbanklending。

Recommendation:SELLat426p



PaulHillalsowritesaweeklyshare-tippingnewsletter,PrecisionGuidedInvestments。

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