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TEMPUS

It shouldn’t happen to a vet supplier

RSPCA find five abandoned puppies
Dechra specialises in treatments such as vaccines and antibiotic sprays for pets
MARTIN RICKETT / PA

Dechra Pharmaceuticals suffered the sharpest ever one-day fall in its share price yesterday as investors took fright at an array of risks ranging from a hard Brexit to the changing face of the veterinary market.

It’s hard not to conclude that the drop, of more than 20 per cent, was overdone. There are many moving parts at Dechra, a supplier of products to veterinary practices across Europe and North America, but none appear to merit a fall such as that.

Dechra Pharmaceuticals traces its history back to 1819 when it was founded as Arnolds & Son, a business that made prosthetic limbs. Having moved into the veterinary market during the Crimean war, it has expanded through acquisitions and organic growth and now specialises in treatments such as vaccines and antibiotic sprays for pets, horses and “food-producing animals”, such as chickens and pigs, and produces specialist diet foods for animals. It operates in 50 countries, mainly in Europe and North America.

Dechra operates in a consolidating market. Veterinary practices are merging, mainly to create benefits of scale, at the fastest rate ever (especially in Britain). At the same time, suppliers, which it uses to get its products to vets, increasingly are concentrating on prioritising their discounted own-brand products. Distributors, particularly in North America, also are merging.

Dechra has been happy to get involved in this M&A activity. In the past 12 months it’s bought Rxvet, a pet products business in New Zealand, AST Farma, which also makes treatments for dogs and cats and the like in the Netherlands, and Le Vet, which operates in non-Dutch markets in the European Union.

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Enlarged veterinary practices — and, indeed, bigger distributors — will have much more muscle in negotiating discounts for buying or selling on Dechra’s products in bulk. In practice, though, Dechra can live with this as it will be far cheaper to service a single big customer where before it may have been dealing with 25 or even 50 separate companies.

Then there’s Brexit. Dechra told its investors yesterday that it was implementing a plan based on a no-deal departure from the EU next March, under which the bloc would refuse to recognise products tested and authorised in Britain. Dechra is setting up an EU-based company so that there will be no technical barrier to trade. In addition, it is setting up a laboratory in the bloc, equipped with staff who can test products to ensure that they conform with EU guidelines if it turns out that they are required separately. This is a headache, but will cost Dechra only £200,000 up front, plus a one-off expense of £1 million and additional operating costs of £800,000 a year — peanuts for a business with annual revenues of more than £400 million and a profit margin of 24.4 per cent.

In short, none of this justifies the slump in its price; Dechra ended the day yesterday down 668p, or 21.4 per cent, at £24.52.

Its annual numbers were strong. Taking into account the contribution from acquisitions, there was double-digit growth in both profits and revenues over the 12 months to the end of June. The United States, where there were no deals last year, increased its revenues by a healthy 18.2 per cent and the profitability of the consolidated businesses in Europe improved sharply.

Nevertheless Dechra shares are insanely highly rated, even after yesterday, trading on an earnings multiple of a whopping 71 times and with a dividend yield just shy of 1 per cent. The group is in good shape and seems well placed to adapt to its changing market; still, it’s as hard to justify buying the shares as it is to defend yesterday’s fall.
Advice
Steer clear
Why A perfectly healthy business, but with a valuation that seems indefensible

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Finsbury Food
Finsbury Food has to win full marks for sheer effort. Every time it hits a hurdle — and there have been plenty — it finds a way to get over it.

It was at it again yesterday, spending up to £25 million buying Ultrapharm, a “free from” bakery with sites in Britain and Poland that gives it yet another growth opportunity. The “free from” here is gluten and owning Ultrapharm should help Finsbury to capitalise on the rise of the health-conscious shopper, as well as the market for those with specialist diets.

Finsbury was founded in 2002 when an investment vehicle controlled by Lord Saatchi took over Memory Lane Cakes and changed its name. Lord Saatchi is long gone and the group now consists of seven (eight with Ultrapharm) bakery and cake-making companies, including Nicholas & Harris, Fletchers and Lightbody. It operates in mainland Europe, mainly France and the Benelux region, as well as Britain.

Finsbury has had to adapt to a world of higher wages and rising butter, cocoa and egg prices against a backdrop of declining consumer confidence. In response, it has cut back its workforce, tried cheaper ingredients, lifted prices and shut its loss-making croissant and pastry factory Grain D’Or. It also has successfully exploited niche markets, with products such as low-fat cakes for Weight Watchers and organic breads for Cranks.

Buying Ultrapharm is in the same mould. Finsbury is paying 20 times Ultrapharm’s pre-tax profits last year, or almost 1.3 times last year’s annual revenues, which feels about right. The company has assets of £10.8 million. The acquisition is not life-changing for Finsbury and the shares added only 1½p to 126p, but it is smart. Finsbury’s core division is growing gently in the face of the tough economic backdrop, but trading overseas has been particularly tough.

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Tempus recommended buying the shares in March, since when they have gained in value by a little over 8 per cent. Finsbury is impressively resilient and if you own the shares they’re probably worth keeping.
Advice
Hold
Why It has adapted well to rising pressure in its market and moves into niche growth areas seem to be paying off.

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