CVS Group – favorable market conditions boost profit

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Full year revenue rose 8.6% to £554.2m, reflecting like-for-like growth (LFL) of 8%. That comes as there is “increasing demand” for the group’s services as the pet population is growing. Underlying cash profits (EBITDA) rose 10.2% to £107.4m.

CVS said LFL growth has been strong in the first ten weeks of the new financial year, but remains ”mindful of the wider macroeconomic backdrop and inflationary pressures”.

A final dividend of 7p per share was announced, up from 6.5p last year.

The shares were unmoved following the announcement.

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Our View

Pet numbers have boomed in the UK over the last couple of years. That puts CVS Group – a leading vet network – in a good position.

The group operates hundreds of veterinary practices across the UK, Ireland and the Netherlands, plus a handful of diagnostic laboratories and pet crematoria. They’re supported by the rapidly growing Animed online veterinary pharmacy. We expect this division will only build scale and become more profitable. Offering services across the broad spectrum of pet needs helps CVS capture as much revenue from owners as possible.

Since listing in 2008, group earnings per share have grown steadily, fueled by the acquisition of small independent vet practices. Keeping acquisitions small limits the risk of each individual deal, and new practices get maximum benefit from the wider group’s buying power.

Acquisitions remain key, especially in the more fragmented Irish and Dutch markets. The group’s also open to entering new geographies; and with less competition in Europe, deals on the continent are cheaper. Net debt, as a proportion of cash profits, is well below one, giving CVS the power to pounce on any larger deals as they emerge. By targeting companies with valuation multiples of around 10 times earnings on acquisitions, well below the ratio investors are currently prepared to pay for CVS shares, these bolt-on targets are well placed to create shareholder value.

Better integration of acquired businesses allows costs to be streamlined too, plus the group’s also paying attention to organic profit growth. Effectively cross-selling services like Animed and the crematoria could boost sales at minimal cost. The 475,000-member Healthy Pet Club, which provides services and discounts to subscribers, should help on that front.

The other thing to point out is the relative resilience of CVS. The macro economic environment is uncertain. But people are willing to spend money for the sake of their pet’s health, and would only stop doing this as a last resort. That’s a benefit not all companies can boast in the current climate.

For all CVS’s positives, it has one major weakness. The company relies on a ready supply of highly skilled professionals, and at times the supply has been anything but ready. The group’s struggled to recruit staff in the past, and subsequent wage increases hit profit growth and the share price hard. While CVS has taken steps to mitigate that risk, it remains an industry-wide challenge as veterinary demand increases.

CVS Group is a beneficiary of the growing pet industry. This is a structural shift which is unlikely to change any time soon in our opinion. That’s reflected in a high-teens price to earnings ratio, which despite being lower than the longer-run average, suggests investors are still paying for the group’s strengths.

CVS key facts

  • Forward price/earnings ratio: 18.0
  • Ten-year average forward price/earnings ratio: 20.5
  • Prospective dividend yield (next 12 months): 0.6%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.

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Full year results

Veterinary Practices, the group’s largest division, saw revenue rise 8.5% to £492.1m, despite a weaker performance in the final quarter due to Covid-19. The Healthy Pet Club scheme, which offers routine flea and worming treatments and vaccinations along with health checks, now has 475,000 members. Underlying cash profits (EBITDA) were £108.8m, up from £98.4m.

There was a 6% increase in the average number of vets employed, with a record number of graduate vets recruited. Vet and nurse vacancy rates have been relatively steady.

In the Laboratories business, revenue was £27.2m, compared to £28.0m last year. This is because results were boosted last year from one-off Covid testing. Without this, revenue was up 1.1% this year. Underlying EBITDA was £8.3m, down from £9.1m.

Crematoria revenue of £9.5m rose (2021: £8.0m), this was driven by the newer direct cremation service. Underlying EBITDA rose over 21% to £3.4m.

CVS’ online pet food and pharmacy retailer Animated Direct, saw Online Retail revenue rise 11.8% to £46.6m, while underlying EBITDA was up 20.7% to £3.5m. This reflects the benefit of increased marketing, despite an 8.9% reduction in unique customer numbers.

The group spent £24.5m on capital expenditure, which was up from £16.6m last year. Higher profits meant free cash flow still increased, rising by a third to £52.0m. Net debt fell to £35.3m from £50.2m.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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