Business Overview

AIM-listed ECO Animal Health Group PLC (LON: EAH) is a United Kingdom-based leader in the development, marketing, and registration of pharmaceutical products for international animal health markets. For these growth markets, the company’s products encourage well-being in animals. The financial objectives are attained through the responsible and careful application of science to create value for the investors. It was started in 1972. The company joined the Alternative Investment Market (AIM) index in 1995. In 2018, the group was established in Ireland as an ECO Animal Health Europe and ECO Pharm Ltd, a new joint venture with PharmGate, established to sell vaccines. The principal activity of the company is the supply and manufacture of animal health products across the world. Through a network, these activities are conducted on an international scale, comprising both overseas subsidiaries and regional offices (notably in Princeton and Shanghai). The group's products consist of Ecomectin and Aivlosin. Ecomectin product is an endectocide, which controls ticks, worms, mange, and lice in grazing stock and pigs. Aivlosin product is an antibiotic that treats a range of respiratory diseases and specific enteric (gut) in poultry and pigs. The company’s operations are spread across Europe and the United Kingdom, North America, Latin America, the Far East, and the Middle East and Africa.

Management

The current Non-Executive Chairman is Andrew Jones. Marc Loomes holds the responsibilities of the Chief Executive Officer, and he joined ECO Animal Health in October 2004. Christopher Wilks is the current CFO (Chief Financial Officer). Anthony Rawlinson is the Non-Executive Director of the company.

Key Statistics



Top Shareholders 
 

(Source: Thomson Reuters)

Global Reach


(Source: Company Website)

The company has several trading companies, including Eco Animal Health Limited; Eco Animal Health Southern Africa (Pty) Limited; Zhejiang Eco Biok Animal Health Products Limited; Eco Animal Health do Brasil Ltda; ECO Animal Health Japan Inc.; ECO Animal Health de Mexico, S. de R.L. de C.V.; ECO Animal Health USA Corp; ECO Animal Health Malaysia Sdn Bhd; ECO Animal Health India Private Ltd; and ECO Animal Health Europe Ltd. In more than 70 countries, the group provided their sales. The company has 13 regional offices and 200 employees, including many PhD’s and Veterinarians.

Recent News

On 30^th January 2020, the company announced that its subsidiary ECO Animal Health Ltd. had received marketing authorisation from the Ministry of Agriculture, Directorate General of Livestock and Animal Health of the Republic of Indonesia. The agreement is for the use of Aivlosin® water-soluble granules in chickens putting eggs for human consumption, with a zero-day drug withdrawal phase for eggs.

Financial Highlights (for the six months to 30 September 2019)


(Source: Interim reports, Company Fillings, LSE)

For the six months ended 30 September 2019, the company’s revenue decreased by 4 per cent to £28.7 million as compared with the corresponding period of the last year (H1 FY2019 restated: £30.0 million).  Historically, the company has reported a second-half weighting to its revenue, representing between 55 per cent and 60 per cent of the full-year revenue. The gross margin for the first half of 2020 was reported at 43 per cent, a decrease from 49 per cent (restated) in the equivalent period the previous year.  This decrease was mainly driven by a decline in average gross margin in the United States, where discounted pricing was expected in the face of low pork prices. In the first half of 2020, the administrative expenses increased by 17 per cent to £7.2 million as compared with the corresponding period of the last year (H1 FY2019 restated: £6.1 million). Research and development expenditure was explicitly demonstrated on the income statement (IS) and together with the total amount capitalised for the six months ended 30 September 2019, represented a cash investment of 17 per cent of revenue, and increase from 13 per cent in the six months period ended 30 September 2018 restated. Earnings before interest, tax, depreciation, amortisation and share-based payments ("EBITDA") were stated at £2.7 million for the six months ended 30 September 2019 versus £6.4 million in the six months period ended 30 September 2018.  This decrease in profitability was a result of the impacts of African Swine Fever (ASF) in China, increased administrative costs, research and development expenditure, and reduced USA gross margins. The earnings per share were reported at 1.51 pence in the first half of 2020 versus 5.61 pence in the first half of 2019. Led by the lower trading profits in the period, the cash generated from operations stood at £0.7 million in H1 FY20 against the same period last year (H1 FY2019 restated: £5.8 million). On 30^th September 2019, the net cash was stated at £13.4 million, a decrease from the previous period (31 March 2019 restated: £16.9 million).

Geographical Analysis


(Source: Interim reports, Company Fillings, LSE)

In the six months ended 30 September 2019, the revenue from Asia and Japan, excluding China increased by 53 per cent to £8.7 million as compared with the corresponding period of the last year (H1 FY19: £5.7 million). The revenue from China and North America (the USA and Canada) was reported at £5.6 million and £3.7 million in H1 FY20. In Latin America, the revenue for the first half of 2020 increased by 13% to £5.2 million against the last year same period (H1 FY19: £4.6 million). The revenue from the Rest of World (RoE) surged by 77% to £5.5 million in the six months ended 30 September 2019 from £3.1 million in the six months ended 30 September 2018.

Key Performance Indicators

Revenue



Revenue growth measures the ability of an increase in price and/or surge in the volume sold. The revenue for the financial year 2019 surged by 11% to £74.6 million as compared with the financial year 2018 of £67.2 million.

Gross Profit



Gross profit, the first level of profitability, tells investors how great a group is at producing a product. The gross profit for the financial year 2019 was reported at £33.9 million, an increase of 5% against the previous year (2018: £32.2 million).

Adjusted EBITDA



Adjusted EBITDA (the profits before tax adjusted for share-based payments, foreign exchange, net finance income, depreciation, amortisation and impairment charges) is used by the managers and the Executive Leadership Team to identify the performance of the company and useful information related to the profitability of the company. Due to higher revenue growth and decline in the research and development expenses for the period, the adjusted EBITDA increased by 3 per cent to GBP 20.1 million in FY2019 from GBP 19.6 million in FY2018.

Earnings Per Share



The earnings per share (EPS) metric is one of the most crucial variables in determining a share's price. It is also a key component used to evaluate the price-to-earnings valuation ratio. The earnings per share for the financial year 2019 increased by 24% to 17.60 pence against the previous year (FY18: 14.19 pence).

Financial Ratios



The reported EBITDA margin for the first half of FY2020 stood at 7.5 per centversus the EBITDA margin of 19.8 per cent reported in the last year for the same period. The company reported a net margin of 4 per cent for the first half of the financial year 2020 as against a net margin of 15.5 per cent reported in last year for the same period. Return on equity for the first half of the Financial year 2020 stood at 1.3 per cent versus a return on equity of 4 per cent in last year for the same period. On the liquidity front, ECO Animal Health Group Plc’s current ratio stood at 3.58x and was higher than the industry median of 2.28x, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the ECO Animal Health Group Plc’s was 0.03x, which was lower as compared to the industry median of 0.17x, reflecting that the company is less leveraged as compared to its peers. On leverage front, the asset-equity ratio of the ECO Animal Health Group Plc’s was 1.29x and was higher than the last years’ asset-equity ratio of 1.29x. The inventory turnover ratio for the first half of 2020 was reported at 0.8x and remained the same from the previous year same period data.

Share Price Performance


Daily Chart as of January 30th, 2020, before the market close (Source: Thomson Reuters)

ECO Animal Health Group PLC shares were trading at GBX 257.70 at the time of writing before the market close (at 12:22 PM GMT) on 30th January 2020 and were down by 0.88% versus the previous day closing price. Stock 52 weeks High and Low are GBX 500/GBX 155. Today’s volume in the company’s share stood at 92,428. Stock’s average traded volume for 5 days was 89,814.00; 30 days – 171,005.53 and 90 days – 134,070.37. The traded (average) volume for five days was down by 47.48 per cent versus 30 days traded (average) volume. The group’s stock is reflecting significantly lower volatility as against the benchmark index based on the company’s beta of 0.60. The outstanding market capitalisation was around £175.64 million, with a dividend yield of 4.25 per cent. The shares of the company have delivered a positive return of 24.49 per cent in the year to date basis.

Valuation Methodology

Method 1: EV/EBITDA Multiple Approach (NTM)



To compare ECO Animal Health Group PLC with its peers, EV/EBITDA multiple has been used. The peers are Orexo AB (NTM EV/EBITDA was 10.24), Photocure ASA (NTM EV/EBITDA was 24.72), Amryt Pharma Holdings Ltd (NTM EV/EBITDA was 12.29), Benchmark Holdings PLC (NTM EV/EBITDA was 21.59) Veloxis Pharmaceuticals AS (NTM EV/EBITDA was 25.56) and Pierrel SpA (NTM EV/EBITDA was 11.94). The average of EV/EBITDA (NTM) of the company’s peers was 17.72x (approx.).

Method 2: EV/Sales Multiple Approach (NTM)



To compare ECO Animal Health Group PLC with its peers, EV/Sales multiple has been used. The peers are Shedir Pharma Sri (NTM EV/Sales was 1.27), Orexo AB (NTM EV/Sales was 2.61), Photocure ASA (NTM EV/Sales was 5.83), Amryt Pharma Holdings Ltd (NTM EV/Sales was 1.58) and Benchmark Holdings PLC (NTM EV/Sales was 2.26). The Average of EV/Sales (NTM) of the company’s peers was 2.71x (approx.).

Risk Assessments and Growth Prospects

There are several highly conservative risks for the company like High reliance on one supplier for key products, Reliance placed on key staff, High dependency on a single product, Operational activities may result in environmental pollution, Failure to achieve/maintain GMP quality standard, Cyber-attack, and Insufficient funding for business growth. The company operates in multiple geographies, and its profits can be impacted negatively due to foreign exchange rate fluctuations. Moreover, economic conditions within the geographic areas within which it operates influences the operating and financial performance of the company and can face uncertainty in the medium-to-long term due to ongoing Brexit. The company also face the risk due to the trade tensions between the USA and China, together with the sharply increasing exports of pork from the United States.

In China, the effect of ASF will be felt for a few times to come but it is apparent that the social and economic imperative to expand pork production in China region.  Initial indications for the second half of 2020 in buying behaviour for the company's products, support a stronger demand in China. Enhanced industry margins will enable the ECO Animal Health Group to increase margins in the financial year 2020 and decrease discount programmes. Some milestones in the research and developments programme in the upcoming months is planned.  For the financial year 2020, the company is indicating to report stronger performance results.

Conclusion
 

For the first half of 2020, the company had a challenging start, but the group now indicates aspects that point to enhanced performance in the second half of 2020, due to positive hope of initial recovery in China and improved prices in the North America region. The Board of the company has made substantial growth in reviewing its accounting policies. The company stay confident and excited about prospects for the business and the increasing market conditions. In the latest news, Indonesia is ranked the eighth globally and the number one market in Southeast Asia, for laying bird numbers. It is important that the consumption of Aivlosin delivers a zero-day drug withdrawal period for eggs which is a substantial competitive advantage for the group. This latest approval shows the company’s continued growth in rolling out this indication for commercial layers.

Based on the decent prospects and supported by valuation as done using the above two methods, we have given a “SPECULATIVE BUY” recommendation at the current price of GBX 257.56 (as on 30th January 2020, before the market close at 10:40 AM GMT) with lower double-digit upside potential based on 17.72x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 2.71x NTM EV/Sales multiple (approx.) on FY20E Sales (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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