This agricultural stock has delivered a whopping ten-fold return for shareholders over the past six years. Yet the volatility of the industry in which it operates, and signs of weakening in its main market – North America, mean it’s now looking like a sell:
Genus (GNS), rated a BUY by Panmure Gordon
Genus has delivered a whopping ten-fold return for shareholders over the past six years since hitting a low of around 70p at the height of the 2001 foot-and-mouth epidemic. Its two main businesses are the supply of semen and breeding animals to farmers in the dairy/beef cattle (44% of turnover) and pig (56%) industries.
Genus uses scientific techniques to identify and purchase from breeders, animals that possess the genes responsible for producing off-spring who will yield superior meat quality and greater milk production. Once identified, the elite animals are then housed in remote stud farms across the world to maximise bio-security.
Genus collects around 11.3 million doses of bull semen annually. This is frozen and held in tanks containing liquid nitrogen so that it can be kept indefinitely and later sold across the world.
A shot of semen from Picston Shottle, one of the most highly prized bulls in the world, costs about £50 – a considerable premium to the price farmers pay for more average animals.
The price reflects the fact that cows that have been fathered by one of its prize bulls produce about 14,000 litres of milk a year, double the average output of a British cow.
The porcine business is similar, but instead located principally in two breeding herds in North America. Fine so far, so why do I rate the shares a sell? Firstly the agricultural industry is notoriously volatile. Natural disasters and disease can cause restrictions on animal movements and even lead to the slaughter of breeding stock. The worst-case scenario would be if an infection hit Genus’ stud farms. This could see valuable animals at the affected site being slaughtered, with potential long-term adverse consequences for the business. Furthermore, health risks to humans (eg, ‘mad cow’ disease in beef) can have a rapid and very substantial negative effect on demand from end-consumers.
Secondly, around 47% of turnover is generated from North America, which means that the company is being affected by the weak dollar. On 1 November, Genus raised £19.4m through a placing at 720p, with the funds being used to “manage the disposal programme of its non-core assets” – which could be construed as the board having problems off-loading its surplus operations.
Lastly, and perhaps most importantly, is valuation. The City is projecting sales and underlying earnings per share of £252m and 34.4p respectively for this year, rising to £261m and 37.5p next. That puts the shares on very bullish p/e multiples of 21.3 and 19.5 respectively.
To me, this seems far too expensive for a group that is forecast to deliver organic growth of less than 4% in 2008/2009. Instead, I would assign a fair value of around 480p. Indeed, three non-executive directors appear to concur, as they recently sold their entire stakes at 730p.
Recommendation: SELL at 735p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments