MIDAS SHARE TIPS: Petcare firm Dechra will have its day again

When the going gets tough, man’s best friend sometimes has to take a back seat. That’s a problem for Dechra Pharmaceuticals, the firm your vet turns to when your cat needs a laxative, or your salamander wants some antibiotics.

The animal healthcare company is firefighting on several fronts. Its ‘companion animal’ business (that’s pets to you and me) seems likely to suffer from a cost-of-living crisis that has already seen some families abandon their dogs and cats and many more plan to spend less on Tiddles’ wellbeing. After a boom in pet ownership in lockdown that gave Dechra a boost, any slowdown in this market will create unflattering comparisons.

Elsewhere, the company has a division providing treatments for farm animals, where high costs of raw materials as well as disease outbreaks such as avian flu, make the market uncertain. This combination of issues has made the market nervous, which might explain the collapse in the company’s share price after Dechra reported interim figures this week.

Numbers were in line with the lower end of expectations, but sales and profits have been dampened by several separate issues, causing analysts to trim their forecasts for the full year. The question now is whether those issues are temporary, and if so, how long some of them might last.

Some answers are easier than others. Dechra’s decision to open its own sales and marketing arm in South Korea, losing a distribution partner may have temporarily hit sales in the region but that’s already back on track. The change of nutrition partner in Japan, which also weighed on sales, looks similarly fixable.

Health: Pharmaceuticals for pets are big business

Analysts are more focused on ‘destocking’ in the US, where Dechra says wholesalers seem to be holding less inventory, creating a blip in sales. It’s unclear how quickly this might unwind and whether it is a more general trend.

Dechra shares fell by over 15 per cent initially, but have since recovered slightly – at £27.56 on Friday they are down 33 per cent on this time a year ago.

Many analysts believe the fall is overdone. Andrew Whitney, at Investec, points out that the animal healthcare market is ‘resilient’, and adds that the company’s new pipeline of drugs, including a long-acting dog insulin, should help it to outperform its peers. Max Herrmann, at investment banker Stifel, says that the company’s lower figures reflect a positive decision to invest in research and development, and expects a return to more normal growth patterns in the rest of the year.

The question investors must ask themselves is whether a still robust petcare market is enough to keep Dechra afloat, or whether the dog has had its day.

Midas verdict: For a company that makes equine sedatives, Dechra certainly still managed to scare the horses this week. The collapse in the company’s share price indicates that many were unprepared for the weaker figures and are nervous about the market that Dechra operates in.

However, this may represent a buying opportunity for the brave. Midas has long been a fan of Dechra, tipping the shares first at £3.97 in 2008, but urging investors to sell out when they hit nearly £50 in September 2021.

At £27.56 this weekend, the shares trade on 24 times forward earnings and are far below this level. Despite the cost-of-living crisis, the petcare market seems relatively robust and Dechra’s pipeline is strong. Buy on this weakness.

Traded on: Main market Ticker: DPH Contact: dechra.com or 01939 211200

This post first appeared on Dailymail.co.uk