Monday, January 9, 2012

NFSC 2012: DPH - Dechra Pharma

I put together my investment case for my second TMF share competition entry. My choice was DPH (Dechra Pharma). Links:
 For convenience, I reproduce the text below.



Principally, Dechra Pharmaceuticals develops drugs for animals. It specialises in companion animals (dogs and cats to you and me) and horses. It also makes specialist pet foods, care products, instruments and consumables to the veterinary profession worldwide. It owns laboratories, where they do a variety of activities, like post mortems, and tests (on blood, faeces, etc.) for diseases, hormone levels, and so on.


DPH should be considered a GARP stock. At 513.4p, it has a market cap of about £340m,  trades on a PER of 14, has a gearing of 35%, and ROE of 23%. Over the last decade, it has a median ROE of 30%. Analysts forecast EPS for 2012 at 39.18p, representing an increase of 14.49% over 2011. The forecast for 2013 is 43.50p, an increase of a further 11.03%. The operating margins over the last decade are about 5.4%, which is not as good as a company like AZN (Astrazeneca) which has been about 27.3%, or GSK (Glaxo) at 31.7%. On the other hand, unlike humans,  is not subject to “ObamaCare”, changes in healthcare plans, and suchlike.

The company has a long record of reasonable debt, great historic returns on equity, and is available at a reasonable price in relation to earnings. The investment case is “more of the same” - you are hoping that the company can continue to innovate and grow earnings like it has done in the past. It looks to be on track to continue to do this. Its revenues for y/e 30-Jun-2011 were £389m, up from £369m prior; an increase of 5.5%. Revenues are split evenly between both halves of the year.

In its prelim results for y/e 30-Jun-2011 (  ) , the company reported:
Although footfall through veterinary practices has declined and the general economic climate remains uncertain we are continuing to demonstrate solid growth in markets in which we trade.  Our branded product range, the focus of our key strategic objective, continues to grow strongly. To sustain this growth we have increased investment in product development, extended the geographies in which we operate, acquired complementary businesses and increased the number of people within sales and marketing.  We believe, therefore, that we are well positioned to ensure future solid growth is maintained and Shareholder value enhanced.

In its IMS dated 04-Nov-2011 ( ), it states:
The Group has started the financial year in line with management expectations with revenue in the first quarter 7.7% ahead of the same period last year. The Board believes that the Group is well positioned to maintain growth despite the uncertain global economic conditions.

On 29-Nov-2011, it reported FDA approval for manufacturing at Dales Pharmaceuticals ( ). The company expects that this will improve medium term margins. FDA approvals for other products are also being looked at.


Warren Buffett posed the question: does the company produce at least one dollar of market value for each dollar it retains in earnings.

Fortunately, it does. Over the last decade, it has earned 144.23p in basic EPS. Dividends have totalled 71.83p over that period. So the retained earnings have been 72.40p (the difference). During a 10-year period, the share price has grown from about 160p to where it is now: around 510p. That’s an increase of 350p - way in excess of the retained earnings.



Total basic earnings for the last decade was 144.23p. For adjusted earnings, it was 184.44p. So adjusted to basic earnings is 1.28. For a company like AZN, it is 1.04 (2100.59/2029.46), and for GSK it is 1.19 (923.19/776). Ideally, the ratio should be about parity. AZN has the best quality of earnings, and DPH has the worst. Investors will have to make up their own mind if this is tolerable.


Total cashflow per share was 191.82p. It is above the adjusted earnings of 184.44p, which is good, but it is only just above.


DPH has a gearing of 35%, and negative net tangible assets. It has a z-score of 3.23, so looks safe. It has net debt of £34m, which looks reasonable against profits for the latest financial year of £14m, which contained write-downs in any event. It has a current ratio of 1.55.


For the decade, the median ROE was 30.4%. For the latest year, it was 23.1%. The company’s z-score has been consistently high, suggesting that its profitability is due to good returns on capital as opposed to being flattered by financial leverage.


Median operating margins for the last decade has been 5.4%. It currently stands at 8.2%. Median net profit margins for the decade have been 3.1%. It currently stands at 3.6%.


Analysts forecast earnings of 39.16p for y/e 30-Jun-2012, representing growth of 14%. For y/e 30-Jun-2013, the earnings are forecast at 43.39p, a further increase of 11%. Seeing double-digit earnings growth on a reasonable PE was an attraction for me.


Directors own 2.16m shares between them. There are 66.46m shares in issue, so management account for 3.2% ownership. Director Simon Evans shares are valued at £4.7m, Ian Page at £3.8m, and Edwin Torr at £2.1m. Three other directors have about £300k worth of shares between them. I am reassured to see the directors substantial stakes in the company.


I have used exponential fit models to determine an average annual growth rate over the last decade. Revenues have grown by 10.8% CAGR, operating profits by 17.8% CAGR, adjusted EPS by 16.0% CAGR, and number of shares in issue (which ideally should be as low as possible, of course) by 4.0% CAGR

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