Animal care targets European expansion

Animalcare has announced interims for the six months to Dec 07 in line with expectations. This was the period before the acquisition of Animalcare Ltd in Jan 08, when the group was trading as Ritchey. The Ritchey business is traditionally H2 weighted, with the key breeding season from Jan to Apr accounting for the majority of divisional profits. Going forwards, the Animalcare division will account for the bulk of group profits and is much less seasonal. Accordingly we are leaving ou forecasts for the full year unchanged. The shares have held up well since admission to AIM and we reiterate our Buy recommendation and 12m

Price Target of 76p.

Interims Highlights

Turnover of £3.4m was down 7.5% YoY, impacted by challenging market conditions in the livestock market, one off factors such as the Foot & Mouth Outbreak and a lower level of low margin business from an overseas supplier. Gross margins however advanced by a notable 220 bps. The small loss for the period of £5k was anticipated and well flagged in the AIM Admission document. Net cash at the period end was £230k.

The outlook for the second half looks more encouraging, with management reporting increased trading volumes and higher livestock selling prices in evidence, albeit with lower livestock numbers. Equally encouraging is the fact that the integration of Animalcare looks to be progressing smoothly and trading in line with expectations.

Investment Case

Going forward, the enlarged group is a significantly different entity with a much enhanced investment case. The acquisition of Animalcare Ltd markedly raises the growth profile and the new pharmaceutical products development programme, focussed on companion animals, is central to the proposition. The opportunities in this area are meaningful and the imminent launch of several new products developed internally is anticipated to drive earnings growth over the next 2-3 years. The harmonisation of European regulations is also a key catalyst in opening up pan-European opportunities.

Valuation

In our opinion, the current P/E valuation of 9.0x offers attractive upside potential for incoming investors given the anticipated growth, the possibility of further earnings enhancing acquisitions and the reducing proportion of earnings derived from Ritchey. A dividend yield of 3% and a prospective free-cashflow yield of 10% are worth citing too. We retain our 12m Price Target of 76p, which is based on an average of P/E, EV/EBITDA and DCF analysis. Over time, we would expect the discount to the Animal Health/Pharma companies to narrow as the new productdevelopment pipeline matures and further products are launched.