ECO Animal Health Group’s shares higher after it delivers upbeat results

Shares in ECO Animal Health Group (LON:EAH) were higher by 6.6 per cent at 235 pence each by 1pm today, after the company said its current financial year had started well and reported a strong increase in profit and revenue for the 12 months to 31 March.

ECO, which makes environmentally-friendly drugs for livestock, said it had seen positive trends in many of its key markets. Demand from China, its largest market, is strong and it continues to build a presence there and in other important territories. The firm added that it was optimistic that it would soon receive clearance from the US Food and Drug Administration to begin sales of Aivlosin – its flagship drug that is used to provide control of major respiratory and enteric diseases in both pigs and poultry – in that country.

Today’s results showed that the group increased its turnover for the year to 31 March by 24.4 per cent to £27.1 million (2010: £21.7 million), while its profit – before non-cash charges such as tax, depreciation and amortisation – improved by more than 16 per cent to £6.4 million.

On average margins were slightly lower, restrained by currency movements such as last year’s strength of sterling against the US dollar as well as by the regional mix of Aivlosin sales and an aggressive local pricing policy to secure large tender business in Brazil.

But sales growth in key markets was strong. China, India and Japan posted growth in excess of 40 per cent, while Latin America and South East Asia saw growth exceeding 25 per cent. Sales from ECO’s Chinese subsidiary Zhejiang ECO Biok Animal Health Products were greater by nearly 30 per cent in the local currency (and by close to 35 per cent in sterling).

ECO said it believes that China remains the market with the greatest potential for its products and it is continuing to seek further opportunities in the country. After China, the US – a market that represents about one third of global demand for animal health drugs – is the next major market that the company is targeting and it expects to launch there soon.

The US FDA is still studying ECO’s most-recent dossier submission to allow the firm to obtain its first Aivlosin marketing authorisation for a pig claim, while more work is being carried out so that further claims for Aivlosin in the US can be added in the near future. 

ECO’s Japanese subsidiary, ECOpharma, exceeded expectations during its first full year of trading. Following the earthquake in Japan in March 2011, the business’s staff and customers remained safe from danger and business returned to normal quickly, ECO said.

Europe was broadly flat during the year, reflecting challenging economic conditions in the region. But the firm added that the UK was a notable exception with ECO’s new direct-to-market strategy, together with the launch of Aivlosin for ‘bulgy eye’ – a respiratory disease of pheasants caused by mycoplasma – being well received, delivering sales growth of more than 40 per cent.

Cash generation at ECO continued to be strong during the year, with £8.5 million generated compared with £3.3 million in 2010. The firm said that this was achieved thanks to the ongoing implementation of its aggressive stock and debtor management policies

ECO has declared a dividend of three pence per share for the year – an increase of 30 per cent over the 2.3 pence it declared for 2010.

“ECO Animal Health Group has delivered another strong set of results for the year ended 31 March 2011 and the current year has started well,” said Peter Lawrence, ECO’s executive chairman. “Overall, ECO is well positioned with an excellent product range, exciting growth opportunities and potentially very important new products in the development phase. The company is poised to accelerate its growth and continue to deliver value to its shareholders.”

Cenkos Securities, ECO's house broker, believes the group is close to receiving marketing authorisation for Aivlosin in the US. "This represents a huge opportunity for the group although the timeline (which is outside of ECO's control) has lengthened beyond our original expectations," it said.

Cenkos forecasts revenues for the current financial year to 31 March 2012 at £30 million, with adjusted pre-tax profits of £3.1 million (translating to earnings per share of 4.2 pence).

The broker pointed out that ECO's business model uses third-party distributors who earn up to 50 per cent margins. If the company was acquired by a multinational animal health business, with its own sales force, then the gross profit contribution that could be achieved would be nearly treble that currently produced by ECO. 

For this reason, Cenkos believes that ECO could be worth 600 pence per share.