Shares in global animal genetics company Genus (GNS) sank 15% to £44.34 on Wednesday after the company said it expected full year pre-tax profit to be modestly below prior expectations.
The company had already flagged volatile pig prices when it reported full year numbers in September, saying it expected the headwind to last for some months, which would reduce growth below its medium term 10% target.
HARSH BUT FAIR
While disappointing news, the share price fall seems excessive given the shares had already dropped 11% since September and today’s downgrade is modest, couched in language which usually indicates a single digit percentage miss.
That said, today’s sharp fall in the shares is a timely reminder that shares trading on a premium valuation-Genus is trading on a forward PE of 48 times-can be punished severely on the slightest hint of negative news.
Today, the company said since September Chinese pig prices fell from 20 RMB (Renminbi)/kg (per kilogramme) to a low of 10 RMB/kg in early October, before recovering to 17 RMB/kg recently.
These prices are uneconomic for local pig farmers and they have been reducing the size of their sow herds accordingly which has impacted demand for Genus’ products.
Consequently, in the four months to 31 October volumes in the porcine business were lower than the prior year while royalty revenues showed continued growth and the bovine businesses achieved continued volume and revenue growth.
MEDIUM TERM OPPORTUNITY
Ultimately the reduced herds will need to be replaced, storing up future demand for Genus’ porcine genetics which enhance the quality and price of the herd.
Looking out to the 2023 financial year the company said it remained positive on the medium-term growth prospects in China and continued to invest in the local supply chain to capture the growth opportunity.
Outside of China, the company said trading in both the porcine and bovine businesses had made progress and met profit expectations.
In addition, the company said it continued to make good progress on strategic initiatives with ‘significant investments’ in research and development and capital projects, supporting the long-term growth of the group.
