A poor trading update has overshadowed a move by Dechra Pharmaceuticals (DPH) to focus on higher-margin products. Its shares collapsed by 8.1% to 685p after flagging US supply issues and bad weather conditions disrupting product deliveries. Yet one analyst reckons it is now a takeover target.
Stockbroker Investec reckons earnings will be 5% below forecasts, prompting it to slash revenue and profit expectations. Contributing to these downgrades are the dilutive effect to earnings of selling its services arm and increased investment into its new product pipeline. Investec shifts its rating from 'add' to 'hold', saying fair value is 700p.
Dechra’s chief executive Ian Page expects the current financial year to remain challenging.
While the current situation looks disappointing, Panmure Gordon analyst Savvas Neophytou says the sale of the service arm makes Dechra a pureplay veterinary pharmaceutical group and therefore a bid target for one of the major players. He goes against the grain by raising the stock rating from 'hold' to 'buy' with an 850p price target. That equates to 20 times 2013 forecast earnings.
The services business will be sold to Patterson Companies (PDCO: NASDAQ) for £87.5 million cash. The proceeds of the deal, which involves National Veterinary Services, Dechra Laboratories and Dechra Specialist Laboratories, will reduce Dechra’s debt to £15.7 million.
This is a strategic move to repositioning the group towards higher-margin, cash-generative specialist pharmaceutical products. However, it will push the group tax rate up as a greater percentage of product will come from overseas.