Genus plc has a pedigree few businesses can match. The Basingstoke-based FTSE 250 company traces its roots back to 1933 through the Milk Marketing Board's Breeding & Production Division, acquiring the American Breeders Service (founded in 1941) in 1999, and the Pig Improvement Company (established in 1962) in 2005.
Today, it stands as the world's only listed pure-play animal genetics business, selling elite breeding animals, semen and embryos to cattle and pig farmers globally under its PIC and ABS brands.
Yet despite operating what I believe to be one of the highest-quality franchises in the agricultural sector, Genus trades at a valuation that appears to significantly undervalue its competitive position and growth prospects.
It's rare to find a business with genuine competitive moats, decades of intellectual property, and a multi-year growth runway trading at what appears to be a significant discount to intrinsic value.
In its porcine division, Genus operates a beautifully simple business model and commands market leadership with a presence 2.3x larger than its nearest competitor, in a structurally growing market.
The company earns the majority of its revenue in this division from a royalty charged on every piglet born carrying its genetics – a recurring revenue stream that benefits as more farms shift to this model, which better matches costs to revenues.
Genus also benefits from the inexorable shift towards higher-performing genetics across the global pig farming industry. This transition is particularly pronounced in China, the world's largest pork market, where the move towards premium genetics is still in its early stages.
The real excitement lies in Genus's next-generation PRP (Porcine Reproductive and Respiratory Syndrome resistant) pig. This disease-resistant technology addresses one of the industry's most costly challenges and has the potential to underpin a compelling accelerated organic growth story for at least the next decade as Genus looks to share the benefits of its innovation with its customers.
The recently announced sale of part of its Chinese operations to its local partner, forming a joint venture, should both significantly de-gear the balance sheet and potentially accelerate regulatory approval for PRP pigs in China – a transformational catalyst.
Genus' bovine division, whilst historically underperforming, adds further appeal. As the global number two and one of only two companies capable of providing sexed semen technology, this business is undergoing a management-led turnaround to improve returns. The fundamentals are strong; it's a matter of execution.
What makes Genus particularly attractive is the combination of improving financial metrics and structural competitive advantages. Free cashflow is set to strengthen materially as exceptional costs fade, while barriers to entry remain formidably high.
Success in animal genetics requires not just decades of genetic know-how and intellectual property, but also established global distribution networks that cannot be replicated quickly or cheaply.
So why the investment opportunity? The lack of quoted comparables makes Genus difficult for investors to benchmark, whilst the complexity of the business requires deep research to truly understand its quality.
This puts off marginal buyers, creating a valuation anomaly. Private transactions in similar animal genetics businesses have occurred at valuations that appear significantly higher than where Genus currently trades.
The investment case is compelling – it is a fantastic business with very high barriers to entry, dominant competitive positions and multiple years of growth ahead, yet trading at what we believe is a meaningful discount to fair value.
For patient investors willing to look beyond the surface complexity, Genus offers the rare combination of quality, growth, and value that makes for outstanding long-term returns.
Stuart Widdowson is a portfolio manager at Odyssean Investment Trust. The views expressed above should not be taken as investment advice.