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 Pharmaceuticalsthe company your vet goes to if your cat needs a laxative, or your salamander wants some antibiotics.

Putting out the animal health business on multiple fronts. The “companion animal” business (that’s pets to you and me) seems likely to be suffering from a cost-of-living crisis, with some families abandoning their dogs and cats and many more planning to spend less to give to the good of Tiddles. After a boom in pet ownership in lockdown that boosted Dechra, any slowdown in this market will lead to unflattering comparisons.

Elsewhere, the company has a division that provides treatments for farm animals, where high raw material costs and outbreaks of diseases such as bird flu make the market uncertain. This combination of issues has made the market nervous, which may explain the collapse in the company’s share price after Dechra reported interim results this week.

The numbers were in line with the lower end of expectations, but sales and earnings were dampened by several separate issues, leading analysts to downgrade their full-year forecasts. The question now is whether those problems are temporary, and if so, how long some of them may last.

Some answers are easier than others. Dechra’s decision to open its own sales and marketing division in South Korea and the loss of a distribution partner may have temporarily hit sales in the region, but that is already back on track. The change of food partner in Japan, which also weighed on sales, seems to be resolved just as well.

Analysts are more focused on “destocking” in the US, where Dechra says wholesalers appear to be holding fewer inventories, causing sales to fall. It’s unclear how quickly this could decrease and whether it’s a more general trend.

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

Many analysts think the decline is exaggerated. Investec’s Andrew Whitney points out that the animal health market is “resilient,” adding that the company’s new pipeline of drugs, including a long-acting canine insulin, should help it outperform its competitors. Max Herrmann of investment banker Stifel says the company’s lower numbers reflect a positive decision to invest in research and development, and expects a return to more normal growth patterns over the remainder of the year.

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

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

However, this could be a buying opportunity for the brave. Midas has been a longtime fan of Dechra, first tipping the shares 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 are trading at 24 times forward earnings and well below this level. Despite the cost of living crisis, the pet care market appears to be relatively robust and Dechra’s pipeline is strong. Buy on this weakness.

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