More bull-ish on Genus

A strong pound wiped out what little growth there was at big dollar-earner Genus in the year to June. Lower pig prices had already caused a slump in Chinese profits at a time when the animal genetics firm was spending heavily on expanding capacity there. There is, however, a growing sense that the earnings downgrade cycle is over and that profits will take off from here.

Underlying pre-tax profit fell by 8% to £39.3 million over the 12 months, driving underlying earnings per share (EPS) down 5% to 46.5p. That was despite 8% growth at the top line to £372 million, boosted by higher volumes both for pigs and dairy and beef cattle (ABS). Strip out currency fluctuations and revenue was up 12% and profit was at least flat. A lower tax rate helped grow EPS by 3%.

Operating profit halved in Asia to just £6 million following a 25% slump in Chinese pork prices which killed demand for breeding stock. Little wonder that group profit fell by 7% at actual currency to £44.8 million. Profits in China fell by £5 million, but Genus is sticking it out and still believes there's a huge opportunity there. Encouragingly, prices are already rising.

Research and development is delivering results, too. Genus's elite female herd has produced two bull calves with the highest genomic test scores the company has ever seen, while a project to develop sexed bovine semen has successfully completed large-scale field trials.

Significantly, genus has already begun legal proceedings against Sexing Technologies, the current provider of sexed semen, alleging abuse of its monopoly position. As Numis Securities points out, Genus currently past £5-£10 million a year to utilise the technology, so any progress "could prove lucrative".

Analysts at Peel Hunt expect earnings growth of 9% this year and 20% in 2016, giving underlying EPS of 53.5p and 64.1p respectively. That puts the shares, currently trading at 1,150p, on a forward price/earnings (P/E) ratio of 21, and a much more appealing 18 for the following year.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.