Investment Column: Dechra is worth vetting in a recession

Dechra Pharmaceuticals

Alistair Dawber@AlistairDawber
Tuesday 13 January 2009 01:00

Our view: Buy

Share price: 410p (+8p)

Ian Page, the chief executive of the FTSE-250 listed Dechra Pharmaceuticals, says he fears sounding arrogant when he cannot come up with an answer to investors' questions about risks to his business in the foreseeable future.

Dechra is a veterinary medicine group, and one of the main reasons for Mr Page's embarrassed optimism is that one of the last things to go in the face of a recession is Rover the dog's or Jeff the cat's treatment, especially so given the growth of pet insurance in recent years.

Investors have realised this recently and, as most of the FTSE 250 has headed south, Dechra's shares have grown by 20 per cent in the past month alone. In a trading statement issued yesterday, the group said revenue was up 23 per cent on a like-for-like basis in the six months to the end of last year. The shares gained 2 per cent yesterday.

Buyers should always be aware of the possibility that the strong performance of any company, particularly in a downturn, is priced into the stock and that the potential for further growth is muted. Mr Page rejects this, saying the group, which has only in the past few years ventured to markets outside the UK, has opportunities to tap new markets. Analysts at Brewin Dolphin reckon the share price will reach 515p in the next 12 months. "We estimate earnings-per-share growth of 22 per cent and 19 per cent in 2009 and 2010 respectively," they say.

There are concerns to be aware of: the group's distribution business needs to look at costs, by Mr Page's own admission, but on the whole investors would do well from buying Dechra. Buy.

Galliford Try

Our view: Cautious hold

Share price: 35.75p (-0.75p)

As a player in what is the toxic construction sector, Galliford Try deserves at the very least a "well-tried" rosette for its efforts to escape the worst of the downturn. The group has moved its priorities away from the housebuilding sector, which has all but ground to a halt, and turned its attention increasingly to the business of contracting. Throw into the bargain the fact debt has been cut and costs have been slashed and a picture of a group doing what it can to mitigate a recession emerges. The market has responded well with the stock adding more than 20 per cent in the past month.

Investors, however, would be right to be wary. The group is doing what it can, but even finance director Frank Nelson concedes the message is not necessarily getting through to the share price: in the past month, peers Persimmon and Taylor Wimpey have seen their shares rise by more than Galliford Try as some analysts speculate that the industry's stock may have hit the floor.

Another reason for investor nervousness would be the announcement in yesterday's trading update that the interim dividend will be cut, with the smart money on a 50 per cent reduction. The group also said recent trading has been in line with management's expectations.

There is support among the analysts, with those at Royal Bank of Scotland arguing: "At 36p, the shares rate on an 8.6 times price-earnings ratio to June 2009 with a 3.8 per cent dividend yield. The important point is that the group's cash recovery plans are on track, and if we assume the current earnings per share, the diluted private housing business could be sold for about £66m ... the rest of the business could be trading on a price-to-earnings ratio of between 2.1 to 4.3 times, [excluding] housing." We would be inclined to wait until a time when investors can have genuine confidence that the construction sector is over the worst. Cautious hold.

Staffline Recruitment Group

Our view: Cautious hold

Share price: 34p (+3p)

It would strike most people as pretty obvious a recruitment group might suffer as thousands of people lose their jobs; the market thinks so in Staffline's case, with the stock losing more than three-quarters of its value in the past year.

The company, which updated the market yesterday, argues in mitigation that it has a different model to most recruitment groups, and that operating primarily in the food industry the impact on jobs in that sector will be less than it is on other areas. Staffline said full-year profits to 31 December are in line with previous estimates and that overall group sales will be flat compared with last year. The market took heart, with the stock rising by 9.7 per cent.

The company is at the more resilient end of the recruitment market and its "OnSite" model, where the group puts its operations in clients' premises rather than on the high street, saving on rental and office costs, is helping. Watchers at the house broker Altium "take comfort from both the cash generation, the new business secured and the cost reduction programme, all of which augurs well for the future."

Recruiters are never going to do well out of a recession, but if any operate at the defensive end of the market, it is probably Staffline. Cautious hold.

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