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Genus strikes tasty deal to boost European position
Animal genetics specialist Genus (GNS) has caught our eye after striking an interesting partnership deal with leading pig breeding business Hermitage.
Genus uses genetics to produce cattle for high-quality beef, pork and milk for farmers. Its pigs genetics business (PIC) will acquire the genetic rights and intellectual property of Hermitage and gain exposure in Russia, Ukraine and Europe.
It will also benefit from Hermitage’s exclusive distribution and supply chain expertise.
Peel Hunt analyst Charles Hall says Genus’ actions will see its European market share rise from 11% to 15%. The PIC arm accounts for 85% of Genus’ group profit.
What’s next on the agenda for Genus?
Genus hopes to launch its Genus Sorted Semen (GSS) technology later this year, which allows farmers to produce female calves for milk.
Hall is optimistic the technology will help the underperforming bovine division which has struggled with difficult market conditions in China and competition in North America.
The analyst says GSS will reduce costs by a net c£5m due to lower royalty payments and provide a ‘material commercial opportunity’.
In August 2016, a US jury ruled Genus infringed two patents belonging to Inguran, trading as Sexing Technology (ST), to develop its own technology.
It was ordered to pay royalties of $1.75 per straw of semen sold, but these payments are smaller than anticipated.
Genus has its sexed semen ready for commercialisation and awaits the outcome of its request to terminate its contract with ST. If this is unsuccessful, Genus will only have to wait until its contract expires on 31 August 2017.
Liberum analyst Lisa De Neve anticipates pre-tax profit growth will more than double from 6.7% in the year to June 2016 to 15.8% two years later thanks to a forecast recovery in weaker markets and a positive effect from volatile currency.
What are risks to growth?
The pigs division is outperforming the bovine business as lower beef volumes and intense competition hit revenue in the half year to 31 December 2016.
In North America profit fell by 27% in constant currency, driven by an 11% decline in dairy volumes.
Nate Zwald has been appointed as the new chief operating officer of Genus’ bovine business who aims to tackle these issues by raising prices in Latin America and improving sales execution. Zwald used to be the operations boss at Alta Genetics North America.
Genus should benefit from broadly favourable market conditions in porcine and a recovering dairy market in Europe and the US, while prices are likely to remain depressed short-term in China.
Buy at £17.33.