Genus PLC (LON: GNS): 44% growth in profit before tax at constant currency during H1 FY21

Genus PLC (LON: GNS) is an FTSE 250 listed animal genetics Company engaged in the sale of added value products for livestock farming and food producers by applying biotechnology. Moreover, it helps to produce animal protein in the form of milk and meat by providing farmers with the required genetics. Currently, the technology is commercialised in the dairy, beef, and pork food production sectors. Furthermore, GNS sells its products in around 80 countries under the brand 'ABS' (dairy and beef cattle) and 'PIC' (pigs). The Company is headquartered in Basingstoke, United Kingdom and research laboratories located in Madison, Wisconsin, USA.

On 09 September 2021, GNS will release the full-year FY21 results.

(Source: Company presentation)

Recent trend of dividend payments

The Company had paid the interim dividend of 10.3 pence per share on 01 April 2021 with respect to H1 FY21, while the ex-dividend date was 04 March 2021. Moreover, it remained around 10% higher when compared with the interim dividend paid during H1 FY20, driven by strong earnings growth and robust cash generation.

Growth Prospects and Risk Assessment

• High Pig price in China – The Chinese Pork industry was mostly influenced by African swine fever (ASF). Moreover, the ASF outbreak kept pig price inflated and supported higher pork imports. For the coming months, the pig price would be likely to remain moderate, but it would remain higher than historical levels and continue to boost industry sentiments.
• Expansion of Royalty business in China – The PIC business division of GNS is currently serving around one-third of the top 50 Chinese pig producers, and GNS would aim to win new customers driven by robust demand for Genus’s superior genetics in China.
• Strengthening European business through strategic partnerships – The PIC division partnership with Hermitage Genetics and integration of Møllevang would continue to exceed expectations through the wider portfolio of genetics, distribution, and supply.
• Continued shift in ABS product mix – The sexed volume growth of 42% during H1 FY21 illustrated the success story of Sexcel®. Furthermore, it contributed around more than 20% of global sales volume in the ABS business division.
• Beijing Capital Agribusiness Co. Ltd ('BCA') – The long-term partnership with BCA in relation to PRRSv had made accelerated progress during the period. Moreover, the first non-gene edited pigs were shipped from the US to stock BCA multiplication farms during the period.

The net debt to equity ratio of GNS remained lower when compared to the Pharmaceuticals and Biotechnology sector.

Key Risks

• Unsuccessful Acquisition – GNS may get failed to identify lucrative investment opportunity, or it may not be able to perform sound due diligence and end up paying more than the fair target price.
• IntelliGen Technology – The failure to manage the technical and financial risks associated with the rapid development of the IntelliGen Technology would impact the bottom-line business.
• Developing products with a competitive edge – The increased competition to produce the best genetics for customers may increase the cost of GNS.
• Protection of Intellectual Property – Any failure in protecting IP would mean that the Company’s genetic material, methods and technology become freely available to third parties.

Now, we will analyse the Key Fundamental Statistics & Key Shareholders Statistics of Genus PLC.

Baillie Gifford & Co. is the most significant shareholder as it holds nearly 5.41 million shares as of 31 March 2021.   

H1 FY21 Financial Highlights (for the six months ended 31 December 2020, as of 25 February 2021)

(Source: Company result)

• The Company had shown strong revenue growth of around 11% at constant currency and about 6% in actual currency during H1 FY21, driven by high growth markets such as China, Brazil, India, and Russia.
• On the profitability front, the profit before tax rose by around 44% at constant currency during H1 FY21.
• GNS had witnessed strong cash generation during the period as it had reported a free cash flow of around £26.6 million.
• Meanwhile, the Company had managed to reduce the net debt to £92.2 million as of 31 December 2020, with net debt to EBITDA multiple of around 0.8x.
• GNS had shown excellent volume growth of 19% for ABS division, the bovine genetics business. Moreover, the sexed volume rose by 42%, and beef volume had increased by 22% during the period. 

Financial Ratios (H1 FY21)

Share Price Performance Analysis

(Analysis done by Kalkine Group)

On 27 May 2021, at 08:03 AM GMT, GNS’s shares were trading at GBX 5,030.00, which remained the same as the previous day closing price. Stock 52-week High and Low were GBX 5,515.00 and GBX 3,148.00, respectively.

On a weekly chart, the stock is trading above an upward sloping trend line for more than a year and recently formed a bullish harami (bullish reversal) pattern at the end of a correction phase, indicating an upward direction for stock. The momentum indicator RSI (14-period) is trading in positive territory at ~55.62 levels. The trend-following indicator 21-period SMA and 50-period SMA sustaining below current market price and supporting a positive direction for the stock.

In the last one year, GNS’s stock price had delivered a positive return of ~49.26%, while the FTSE All-Share Pharmaceuticals and Biotechnology index (benchmark sector) had produced a return of about negative 9.19%, and FTSE 250 (benchmark index) had generated a return of around 33.70%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Peers used in the valuation methodology (Price/NTM Earnings)

Business Outlook Scenario

GNS had achieved robust strategic progress during H1 FY21. Moreover, the expansion of PIC’s business in China was proven to be a masterstroke as it gained a significant market share with the largest producers. The continued success of Sexcel® and robust performance by the proprietary NuEra® beef business had facilitated record volume growth achieved for ABS business during H1 FY21. From a medium-term perspective, GNS had anticipated to maintain a cash conversion ratio of around 90% and adjusted operating profit to grow at a CAGR of around 10%. Furthermore, GNS would also aim to maintain a strong balance sheet with net debt to EBITDA multiple ranging from 1.0x to 2.0x in the medium term. However, GNS had highlighted of slower growth during H2 FY21 due to increased currency headwinds. Nonetheless, GNS would continue to seek lucrative growth opportunities for delivering significant shareholder returns over the medium term.

Considering the robust profitability, dividend growth, strong financial performance, expansion in China, bright industry outlook, strong cash generation, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Genus at the current price of GBX 5,030.00 (as on 27 May 2021 at 08:03 AM GMT), with lower-double digit upside potential based on 53.67x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*The dividend yield is subject to change as per the stock price movement.

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