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Cautious forecasts for 2023 and a stock at its lowest

The veterinary laboratory communicated its outlook for the next financial year, and the market expected better.

The title of animal health specialist is at its lowest. Since the start of the year, it has seen almost half of its valuation disappear and it still loses almost 5% this morning after revealing its objectives for next year. An unusual communication at this time of the financial year which follows a downward revision of the objectives for 2022 during the last quarterly publication.

Thus, Virbac management is targeting for 2023 an adjusted current operating margin, that is to say before amortization of assets resulting from acquisitions, of between 13 and 15% at constant exchange rates as well as organic growth in a range from 4 to 6%.

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Disappointing operational profitability guidance

A pace lower than that planned for this year: the company is targeting sales growth of 6 to 9% on a like-for-like basis in 2022 and an adjusted operating margin of 14 to 15%. Guidance justified by “the decision to continue to accelerate in 2023 on two key dimensions: R&D and investments”.

The group explains that to maximize the long-term value of its portfolio of research & development projects, it intends to significantly increase its investments in this area. Thus, while it devotes on average 6.5% of its turnover to it, 8.5% of billings will be allocated to R&D next year.

Medium-term objectives confirmed

Furthermore, the group intends to improve its operational efficiency in the medium term, and will therefore increase its investments in 2023 to around 100 million euros, including 20 to 25 million euros for land investments in France. Finally, Virbac intends to boost the geographic expansion of its key products as well as entry “into new markets such as petfood and farm animals in the USA, or antiparasitics and petfood in China”.

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These investments should enable the group to achieve its main medium-term objective, namely an adjusted current operating margin of 20% over the period 2025-2030. Ambitious guidance which remains conditional, according to management, on the schedule of external growth operations, the success rate of R&D projects, and the dynamics of turnover.

Our advice on VIRBAC: KEEP

For the second consecutive year, Virbac expects a drop in its current operating profitability due to investments dedicated to its future growth. A laudable desire in substance, but little appreciated by the market. After reaching its all-time high at €448.50 a year ago, the stock is at its lowest over the period.

Investors anticipated a rebound in margins in 2023 and this communication dampened their hopes. The group is suffering from a less dynamic global market than in recent years, with growth in the animal health sector expected between 3 and 5% next year compared to standards of between 4 and 5% usually.

Above all, the company is counting on its R&D pipeline and the launch of new products to achieve its medium-term guidance. The increase in investments in this area is therefore not a surprise but it logically weighs on the accounts expected next year. Despite the sharp decline in the stock, it seems premature to strengthen the line given these lowered prospects. After taking partial profits at €383 a little over a year ago, we are of the opinion to hold the position while waiting for more positive dynamics.

Price on advice date: €222
Price target: €300, representing a potential of +35.1%
Investor profile: informed public
Investment horizon: 12 months

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