Animalcare Group Corporate Outlook

Animalcare’s sales are expected to fall by 8% in FY12, because of the ongoing effect of lost Buprecare ampoule sales, lower identity chip sales and the termination of a distribution agreement for cat flaps. However, the company should resume its growth profile in FY13 as it benefits from the continued launch of new products and the re-launch of Buprecare ampoules. Its shares have fallen by 23% since its profits warning for FY12, but this appears to be excessive. Underlying growth of its veterinary drugs is c 17% and it has a robust pipeline. Our valuation is reduced by £4.4m to £30.6m.

A Challenging FY12
The combination of the supply issues for Buprecare (cat and dog analgesic, FY11 sales: c £650k), the decision to stop distributing cat flaps and effect of the economic downturn on identity chip sales is expected to cause sales to fall by 7.6% in FY12 and adj. EPS by 19.8%. They led to Animalcare issuing a profits warning in May, and to us reducing our FY12 sales and adj. EPS estimates by 10.1% and 21.1%, respectively.

Back To Growth In FY13
The underlying growth of its pharmaceutical products (49% of sales in FY11) is c 17% and Animalcare should launch four more products in FY13, as well as re-launching Buprecare ampoules. We estimate this will result in FY13 sales increasing by 5.7%, as the effect of lost Buprecare and cat flap sales is annualised in FY12. However, EPS is expected to resume growth from FY14, because the tax rate increases to a normal level in FY13.

Strong Balance Sheet And Cash Generation
Animalcare is expected to generate £2.2m from operations in FY12 and have net cash of £2.3m at year end. This will allow it to maintain its progressive dividend policy and to acquire technologies so that it can make patent-protected products. If Animalcare does develop patent-protected drugs, its risk profile will increase but it should be able to accelerate its growth and make significantly greater returns.

Valuation: DCF And Multiples Valuation Of £30.6m
We have lowered our valuation from £35m to £30.6m or 148p/share, largely because of the profits warning and decline in identification product sales. This reduction of 12.6% compares to a 23% share price fall since Animalcare’s trading update and profit warning. Thus, we believe there has been an overreaction to the company’s difficulties.

To Read the Entire Report Please Click on the pdf File Below.