Dechra can create value through M&A - JPMorgan

Analysts at JPMorgan Cazenove initiated coverage on Dechra Pharmaceuticals at 'overweight' on Monday, calling the veterinary products manufacturer a "diamond in the ruff".

JPM, which sees animal health as an "attractive" healthcare subsector, said the industry was "fragmented" and felt Dechra was Dechra highly capable of creating "significant value" through mergers and acquisitions.

The investment bank's analysts saw attraction in the animal health industry as a result of its strong demographic demand, increasing spend per pet, and increasing animal protein consumption.

Low development costs are another appealing element for the analysts, with the FTSE 250 constituent only needing to reinvest around 5% of revenues, and the sector's "superior sustainability" when compared to human pharmaceuticals, with "far more modest genericisations".

The analysts, which issued Dechra a twelve-month target price of £30, expect to see Dechra's core EPS grow 11% between 2020 and 2023E, driven by a combination of "strong growth in demand for pet medications" and 200bps worth of operating margin expansion.

"We see potential forecast upside from pipeline optionality and M&A. We set a Jun-20 PT of £30, 26x 2021E Core-PE, justified by the strong base business outlook, and upside optionality," concluded JPM.