In this article, we will take a look at why I think Alexander Darwall holds such a large position in biotechnology company Genus PLC (LSE:GNS, Financial), which provides farmers with superior genetics that enable them to produce higher-quality animal protein more efficiently in the form of meat and milk.
First of all, I only say this half tongue in cheek, but Genus is a FTSE 250 constituent. At the rate things are going with all the private equity takeover activity in this group of stocks, I would not be surprised if sooner or later, Genus itself receives a takeover approach. Genus also holds the Green Economy Mark, which means that FTSE Russell says that at least half their revenues come from products and services that contribute to the global green economy.
Perhaps the real reason Darwall is so bullish on this stock, in my view, is the combined megatrends of growing meat consumption (along with the growing world population) and the requirement for sustainable agriculture. Demand for protein from meat is even set to grow faster than the world population growth due to the growing middle classes in emerging markets. The trend of plant-based living among certain populations in ultra-wealthy countries hasn’t got anything on the trend of millions upon millions of nutrition-starved people becoming able to afford meat more often.
Meanwhile, anybody who watched the Netflix (NFLX, Financial) documentary “Kiss the Ground” will know the troubles facing key agricultural resources such as land and water. This is where Genus comes in. Farmers need to operate more efficiently in livestock production while at the same time being more careful on the animal welfare front as big buyers are increasingly selective when it comes to farm produce.
Genus specialises in improving the genetics of a farmer's livestock. Using its proprietary science, farmers can breed healthier and more productive livestock, which ultimately gives them an advantage in a highly competitive farming industry. Using its own domestic production and contracts with breeding companies worldwide, it supplies semen used for artificial insemination.
Genus also has proprietary technology that enables it to screen animal semen for qualities such as female gender for the dairy market. In terms of research and development, Genus is working on gene-editing technology to rear disease-resistant livestock.
Because Genus is a world leader in pig genetics, it has been benefiting a lot from the Chinese market. As African Swine Fever devasted the pig population in China last year, Genus has benefitted by supplying its porcine genetics to help rebuild pig herds there. Pork is a key staple and main source of animal protein in China and any China watcher will know that pork price inflation in China is a political priority.
Moat
As you can probably tell by now, this is a very niche and highly technical business. The science needed is in itself a barrier to entry for competitors. Genus has over 100 PhDs in its 3,100-strong workforce.
The company operates in three segments. Genus PIC and Genus ABS make up the majority of revenue, with R&D also producing a small amount of income.
Genus PIC sells sows, boars and semen to breed pigs with desirable characteristics for pork production. Genus ABS sells bull semen and embryos, which are delivered through artificial insemination to breed calves with desirable characteristics for milk and beef production. The research and development segment identifies genetically superior bulls in several breeds, primarily the Holstein dairy breed.
Genus says R&D is the lifeblood of its business, and the group increased net investment by 19% in the last financial year. Indeed, Genus pursued key strategic initiatives last year to further strengthen its proprietary differentiated offerings. The Group continues to increase its investment in the following areas: gene editing, primarily under the PRRSv programme; genome science and specifically scientific data capabilities; biosystems engineering; and reproductive biology, where new initiatives are being taken.
PRRSv is an incurable respiratory and reproductive syndrome and is one of the most harmful pig diseases in China. The company called its porcine PRRSv-resistance program “potentially transformational” in its most recent results presentation.
Valuaion
In the listed equity world, Genus is rather unique, so it is hard to find direct peers. This also gives the stock a scarcity premium, as its operations would therefore be uncorrelated with others stocks, making the stock a useful portfolio diversifier.
Its products could become fundamental to enabling greater human population growth in the future and could be considered strategically important. The firm’s competitive advantage should continue to strengthen with increased R&D spend.
Genus has a Piotroski F-Score of 6 out of 9, so even though it is perceived as a growth stock, it should be palatable to investors who are concerned about fundamentals. The company’s financial position is strong. Its Altman Z-score had improved from 4.67 in 2019 to 5.24 in 2020. That is obviously a strong score and one that’s moving in the right direction.
The company made a respectable cash flow return on investment of 11.1% last year, with its five year average at 8.2%. This compares favourably with FTSE 250 biotechnology peer Oxford Biomedica PLC (LSE:OXB, Financial) which had a cash flow return on investment of 3.1% last year with a five year average of -4.5%.
Genus has managed to find a good balance between growth and providing returns to shareholders through dividends, which have grown between 5% and 10% a year in each of the last 10 years. Meanwhile, R&D as a percentage of sales has averaged about 10% over the last few years. The dividend yield of about 1% is more than most growth stocks can offer.
Megatrend
Ultimately, I believe owning Genus is like owning an option on the protein/agriculture efficiency megatrend. To quote index provider STOXX:
"The term “megatrend” was coined by US political scientist and author John Naisbitt at the start of the 1980s. It refers to powerful macroeconomic transformative forces that have a major impact on countries, businesses and societies around the world, disrupting the way products and services are produced, delivered and consumed. Such powerful forces typically tend to span business cycles, industries and geographies, creating a vicious cycle of sustained disruption resulting in structural shifts and irreversible transformations in the global economy, businesses and society. Megatrends are by no means a new phenomenon, with countries, industries and society all experiencing them, as noted by Naisbitt in his best-selling book by the same name."
Conclusion
I do not yet own Genus myself because I need to understand more about the risks and downsides to this investment. However, I think it is probably worth a small position in my portfolio, to be seen as a long term call option. With a forward 12-months PEG ratio of 3.2 and a current price-sales ratio of 6.0, the stock is not priced at a crazy level for a growth stock, so it is well worth putting on your biotech watchlist.
