The H113 results confirm Animalcare (ANCR.L) has resumed its underlying growth rates. Revenues were up 13.0% y-o-y, compared to the c 2.5% growth of the veterinary market for companion animals, with underlying profit rising 20.3% y-o-y. Despite promising near-term opportunities, it is the development of new licensed veterinary medicines that will continue to underpin the medium-term outlook. It is this strategic shift towards developing enhanced generics that, while costlier and more protracted, should help generate higher, and more resilient, earnings in what is an increasingly competitive market place.
Transitioning up the value chain
Animalcare Group is enacting a strategy of exiting low-margin, commoditising markets and investing in higher value-adding product development. The focus has been on developing a portfolio of generic drugs with useful differentiation characteristics from the originator product. The next stage sees a subtle emphasis shift towards enhanced generics, which involves more elaborate reformulation of the originator drug. Although these products are inherently riskier and more costly to develop, the greater sales potential, coupled with a degree of patent protection and higher technology content, should offset the higher investment required.
H113 results confirm a return to growth
FY12 was a difficult year as a number of one-off events combined to reduce earnings, but solid H113 results confirm the company has resumed its previous growth track. The underlying revenue and operating profit increase was 13.0% and 20.3% as the new product introductions led the rebound. Two products were introduced during H113, with a further one expected to be launched during H213. Cash generation remains strong, with an operating cash flow of £1.3m and a net cash position of £3.0m at December 2012. For FY13, revenues are expected to rise 9.2% to £11.9m, with PBT up 9.3% to £2.8m and EPS up 5.6% to 11.4p.
Valuation: Raised from £31.8m to £35.9m
Our valuation is £35.9m (an increase of 12.8% from our previous £31.8m), which compares to the current market capitalisation of £26.5m. We value Animalcare using a combination of DCF and peer group comparators. We employ a DCF model to examine the weight of the development pipeline to future earnings growth, but acknowledge the importance of using peer group multiples to maintain perspective. All three of our valuation metrics (calendarised EV/EBITDA and P/E, and DCF) yield a reassuringly compatible range (£36.9m, £39.5m and £33.6m respectively).
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