Dechra Pharmaceuticals and Musti Group ride the pet boom
The COVID-19 pandemic emphasised the fact pets, at whatever price, have become family members. Two company enjoying this transformation are Dechra Pharmaceuticals and Musti Group.
Founded in 1997 by way of a buy-out from Lloyds Chemists, Dechra Pharmaceuticals, which listed on the London Stock Exchange in 2000, is a global specialist developing, manufacturing and selling veterinary pharmaceuticals and related business with a focus on common pets and farm animals. Dechra, has 7 manufacturing sites, 2,200 staff and sells directly to 25 countries and indirectly to 63 countries.
Dechra is a business that the team at Polen Capital have been following for many years but decided not to own due to valuation reasons. They first initiated a position after the broad multiple compression in early 2022 after the stock peaked at over GBP54 in late-2021, eventually troughing just below GBP25 in March 2023. The team added to the stock near the bottom in the fourth quarter of 2022, with an average holding price of approximately GBP29. In April 2023, Dechra announced discussions with EQT, the Swedish private equity giant and the Board agreed to the GBP38.75 cash per share (or GBP4.5b) takeover.
This was less than EQT was initially willing to pay, and the Dechra Board was in a weak bargaining position after announcing their pre-tax earnings fell sharply to GBP29.7 million for the six months to December 2022. This was attributable to destocking in the U.S. and the UK as wholesalers cut their inventory levels. While as long-term investors, more value could have almost certainly been accrued by continuing to own the business, a 44 per cent uplift is a good result for shareholders and Private Equity interest reflects the fantastic value in certain areas of small and mid-caps.
Founded in 1988, Musti Group is the largest pet supply companies in Finland (Head Office), Sweden and Norway with over 340 stores and a significant on-line presence. It has a market capitalisation of €587 million (US$630 million) after its share price halved in the past two years to €18.00.
Musti offers a wide, curated assortment of pet products in both food and non-food categories and has a broad range of exclusive as well as third party brands. The Company also provides pet care services such as grooming, training and veterinary services.
Musti’s has a strong customer focus and is built around trust and the expert advice offered by its store personnel. The company has a popular loyalty club through which members receive targeted communication and special offers as well as gain access to their dedicated online account.
Over the six months to March 2023, revenue grew by 9 per cent to €194 million, EBITDA increased 6 per cent to €34 million and net debt was minimal. In April, Musti announced the full acquisition of their former Danish joint-venture partner, which specialised in premium pet food manufacturing, and should continue to support continued steady growth.
Management is targeting Revenue of €500 million for the year to September 2024, and this compares with the addressable market of €3.4 billion. Targeted EBITA margins of 13 per cent are attributable to increasing gross margins and operating leverage.
If you would like to learn more about the Polen Capital Global Small and Mid Cap Fund, please visit the fund’s web page to learn more: Polen Capital Global Small and Mid Cap Fund
The Polen Captial Global Small and Mid Cap Fund owns shares in Dechra Pharmaceutical and Musti Group. This article was prepared 07 July 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.