19 September 2019

Company Meetings Autumn 2019

We met the companies below and you can learn more on any of these by contacting the person at JM Finn with whom you usually deal.


We met the companies below and you can learn more on any of these by contacting the person at JM Finn with whom you usually deal.

Dechra


Price £28.34
52 week high-low £30.80 – £20.20
Net Yield 1.0%
Hist/Pros PER 33.0 – 28.9
Equity Market Cap £2,908m

Consumer, non-cyclical

Ian Page (CEO), Paul Sandland (CFO) 

Dechra, an international veterinary pharmaceuticals business that specialise in the development, manufacture and distribution of a portfolio of branded and generic drugs, have been able to double operating profit to £50.3m over the past  five years through acquisitions, new product launches and geographic expansion.

Despite revenues and operating profit growth of +18% and +26% respectively for the latest  financial year, they remain con dent on the growth runway which they see for the business, giving the example of more money being spent in the UK on champagne than on veterinary supplies. Management see increased global vet spend being driven by not only the increased welfare standards for pets but also for farm animals.

Although Dechra aren’t typically reliant on any one product, in their pipeline they do have a couple of developments which could be dial moving for the business. One is a novel, once weekly insulin product for dogs, which could take a big chunk of the £100m global daily insulin market. This is, however, likely to be 4-5 years away. The other product is via their 48% stake in a business called Animal Ethics. Animal Ethics are currently developing a pain relief spray (Tri-Solfen) which can be used on livestock following routine farming surgical procedures, such as tail budding on lambs, where previously no pain relief was administered. Tri-Solfen has the potential to be used on a large amount of applications in livestock farming as national governments increasingly enforce higher ethical standards. Management talked about the potential of a world where meat could be labelled as ’pain-free’ in supermarkets. Whether this scenario manifests is another thing, but it is likely that Tri- Solfen will still take many years to commercialise.

 

Intertek


Price £55.16
52 week high-low £59.82 – £44.85
Net Yield 1.8%
Hist/Pros PER 30.7 – 26.2
Equity Market Cap £8,954m

Consumer, non-cyclical

Andre Lacroix, CEO 

Intertek is one of those companies that piggy backs on global trade by being a global leader in testing, inspecting and certifying products, commodities and services.

Andre Lacroix (CEO) discussed their 5X5 strategy for growth and how it integrates with their corporate purpose, which is stated as being “Bringing Quality, Safety and Sustainability to Life”. The depth of this market place was emphasised in the way that the four activities of assurance, testing, certification and inspection (“ATCI”) span the entire value chain from raw material supply to manufacturing to distribution to retail. Upside for growth of GDP plus, came from his view that out of the $200 billion of global TCI activity, only $50 billion has actually been outsourced. They can grow by doing more with their existing customers, cross selling across the customer base (particularly with their new assurance product) and winning new customers from existing outsourcers as well as those who don’t yet outsource.

Their 5X5 strategy is about employee safety and engagement, superior ATCI service, margin accretive revenue growth, strong cash conversion and an accretive capital allocation process to drive their M&A growth. Their thoughts on sustainability centre on the demands from governments, employees, customers and communities together with the need for authentic action, rather than a box ticking process. The result is that companies can ask for the Intertek Total Sustainability Certificate if they pass all ten of their examinable areas. My worry is that revenues from ATCI conflict with the impartiality needed to grant an audited certificate of sustainability

 

National Grid


Price £8.90
52 week high-low £9.27 – £7.45
Net Yield 5.3%
Hist/Pros PER 15.2 – 15.1
Equity Market Cap £30,763m

Utilities

John Pettigrew, CEO, Marcy Reed, President Massachusetts, and Dean Seavers, US Executive Director 

National Grid USA (NGU) generates half of the listed National Grid PLC’s operating income from its transmission and distribution networks that cover seven million accounts and 20 million people. Located in America’s East Coast states, NGU takes electricity from the generator to the customer’s meter; and likewise with gas.

I felt that management think NGU has better growth prospects and higher return prospects than the UK assets. Higher asset growth, is expected to reach 8% per annum as the USA catches up with the UK in terms of mandated investment to replace decaying and old infrastructure like out-dated electricity sub-stations. Recent storms and floods have highlighted the need for a more weather- proofed and reliable network. The company’s growth is also being driven by new connections to renewable electricity generation. Marcy added that a firmer approach to the cost base could move profitability higher at a greater rate.

The US approach to regulated income allows a return on equity or “ROE”. It is then up to NGU to get as close to that return as possible. We were pleased to see that NGU was starting to achieve much closer (95%) to its allowed returns than had been the case in the past (85%). 

The situation in the USA contrasts to the politically charged environment in the UK where politicians of all parties query National Grid’s level of profitability and put pressure on the UK regulator, Ofgem, to lower allowed returns from the start of the next regulatory period which comes into force in spring 2021. Added to that, Labour politicians aspire to nationalise the company as well.

BASIC MATERIALS
BASF, Johnson Matthey, RioTinto, Victrex

CONSUMER GOODS
Watkin Jones 

CONSUMER SERVICES 
Intercontinental Hotels Group, Young & Co's Brewery 

FINANCIALS 
Bank of America, Derwent London

INDUSTRIALS 
Alpha Financial Markets, Halma 

OIL AND GAS
Royal Dutch Shell 

UTILITIES
National Grid, Pennon Group, United Utilities Group


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Autumn Issue Twenty Eight