Dechra Pharmaceuticals Plc (DPH)

Dechra Pharmaceuticals Plc (DPH) is a Northwich, United Kingdom-headquartered international specialist veterinary pharmaceuticals products company, which is engaged in developing, manufacturing and marketing products for veterinarians. As on September 21, 2000, its shares were admitted to the main market of the London Stock Exchange. Fidelity Management & Research Co., Standard Life Investments Ltd. and Royal London Asset Management Ltd. are the major institutional shareholders in the group. (Source: Thomson Reuters).

Recent Development
In the exchange filing made by the group as on August 21, 2019, the group reported that it has acquired Ampharmco LLC, veterinary contract manufacturers specialising in companion animal products, for a cash consideration of $30.0 mn, helping the group to add to its US portfolio an additional approved CAP products and bring in-house manufacturing for a number of its currently outsourced products in the US market. The acquisition includes manufacturing site based in Fort Worth, Texas and associated holding companies, Black Griffin Holdings LLC and Dragon Fire Holdings LLC.

Financial Highlights: FY19

Source: Company filings.

During the financial year under consideration, the company’s revenue surged by 17.5 per cent at a constant exchange rate (CER) to £481.8m from £407.1m reported a year-over period. Consolidated underlying operating profit grew by 27.3% at CER (28.4% at AER) to £127.4 mn, while consolidated reported operating profit increased by 13.5% at CER (14.4% at AER) to £39 mn. Due to growth from both the existing and acquired businesses in EU Pharmaceuticals, underlying EBIT margin increased by 200 bps to 26.4%. Underlying EBITDA increased by 27.7% at CER (28.7% at AER) to £137.2 mn. Reflecting the increased finance charges due to the financing of prior and current year acquisitions, consolidated profit before tax decreased by 4.8% at CER (3.8% at AER) to £27.8 mn, while reported diluted earnings per share declined by 19.6% at CER to 30.07 pence. Reflecting higher finance charges from the rise in debt and equity issuance, underlying diluted EPS grew by 16.6% to 90.01 pence, and dividend per share rose by 23.9% over the period to 31.60 pence.

Stock Performance
 
Daily Price Chart (as on October 21, 2019), before the market close. (Source: Thomson Reuters).

Shares of the DPH have delivered a price-return of approximately 22% on a YoY basis, up by 27% on a YTD basis and declined by approximately 11% over the past one month. While writing (as on October 21, 2019, at 12:47 PM GMT), shares of the DPH were quoting at GBX 2,558 and declined by 68 points or 2.68% against the previous closing price. In the year-ago period, shares of the DPH have registered a 52w high of GBX 3,080.0 and a 52w low of GBX 1,992.0.

Conclusion
The group’s performance in the FY19 was decent, with sales, profit, margin and dividend increased against the year-over period. However, shares of DPH were trading at a substantial-high premium against the peer group companies. Particularly in terms of price-to-earnings ratio, the company's P/E ratio stood at 87.3x whereas industry average P/E stood at 59.7x and in terms of Price-to-Cash flow per share, the company's P/CF stood at 87.3x whereas Industry average P/CF was 42.4x, which reflects that shares of DPH were trading at a higher valuation with lower dividend yield and higher debt/equity ratio.

Therefore, based on the above discussion, we have given an “Avoid” recommendation at the closing price of GBX 2,626.0 (as on October 18, 2019).

 

Sabre Insurance Group (SBRE)

London Stock Exchange-traded Sabre Insurance Group is a provider of motor insurance, based out in the United Kingdom. It underwrites motor insurance, including private cars, taxis, and commercial vehicles through intermediaries. As on December 06, 2017, its shares were admitted to the main market of the London Stock Exchange. Aviva Investors Global Services Ltd., Kayne Anderson Rudnick Investment Management LLC and M&G Investment Management Ltd. are the major institutional shareholders in the group. (Source: Thomson Reuters).

Trading Update: 9M FY19
As on October 10, 2019, the group reported its trading update for the nine months ended as on September 30, 2019. In the statement, the group forecasted for FY19 a combined ratio marginally above their mid-70’s target against 70.6% recorded in the FY18. As management estimated, the gross written premiums (GWP) for the nine months under consideration stood at £152.9m against the year-ago period of £162.6m. For the FY19, the group estimated GWP would be 7% lower against the FY18 data of £210.0m.

However, strong organic capital generation strengthening the potential for an attractive full-year dividend with a solvency coverage ratio of 198% as at the end of September 2019 against 195% reported in the year-ago period, which was above the group’s 140% to 160% target range.

Stock Performance
 
Daily Price Chart (as on October 21, 2019), before the market close. (Source: Thomson Reuters).

At the time of writing (before the market close at 01:51 PM GMT), shares of the SBRE were quoting at GBX 299.0 and added 0.336% against the previous traded level.In the past 52-weeks, its shares have registered a high of GBX 312.0 and a low of GBX 234.45. On a YoY basis, its shares have handed a price return of approximately 18%, and on a YTD basis, its shares have surged around 12%, and in the past one month, its shares have delivered a price return of 5.11% respectively. 

Valuation Methodology


Conclusion
The group's performance during the trailing nine months was moderate; however, its full-year guidance for Gross Written Premium (GWP) was 7% lower against the FY18. However, given the challenging market condition in the UK, the Goss Written Premium slippage could be higher than 7%.

Therefore, based on the above valuation done using the NTM Price-to-Earnings ratio, we have given a “Watch” recommendation at the current price of GBX 299.0 (as on October 21, 2019, before the market closed), while we look for any upcoming catalysts in the near term.
 
*All forecasted figures have been taken from the Thomson Reuters.

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