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.

Recent News
On 30th 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.

Revenue & Margins missed the mark, 2^nd half could be better - H1 FY2020
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. 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. 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 30th September 2019, the net cash was stated at £13.4 million, a decrease from the previous period (31 March 2019 restated: £16.9 million).

Share Price Performance  

Daily Chart as on 4^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 4, 2020, at the time of writing (before the market close, at 10:40 AM GMT), EAH shares were trading at GBX 210, up by 2.44 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 470/GBX 155. 

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology


*Peers: Swedencare AB, Mithra Pharma SA, Shedir Pharma Srl, Pfizer Inc, AB Science SA, Alliance Pharma Plc, Shield Therapeutics Plc and Photocure ASA

Risk Elements
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, etc. 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.

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 eighth globally and the number one market in Southeast Asia, for laying bird numbers.

Based on the decent prospects and supported by valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation at the closing price of GBX 205 (as on 3rd March 2020) with higher single-digit upside potential based on 35.94x NTM P/E (approx.) on FY20E EPS (approx.).

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