CVS Group – favorable market conditions increase profits

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Full-year sales rose 8.6% to £554.2 million, reflecting 8% like-for-like (LFL) growth. This is because the group’s services are “increasingly in demand” as the pet population grows. Underlying cash profit (EBITDA) increased by 10.2% to £107.4m.

CVS said LFL growth had been strong for the first 10 weeks of the new fiscal year but remained “close to the broader macroeconomic backdrop and inflationary pressures.”

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

The shares were not moved after the announcement.

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Our view

The number of pets in the UK has boomed in recent years. This puts the CVS Group – a leading veterinary network – in a good position.

The group operates hundreds of veterinary practices in the UK, Ireland and the Netherlands, as well as a handful of diagnostic laboratories and animal crematoria. They are supported by the rapidly growing online veterinary pharmacy Animed. We assume that this division will only build economies of scale and become more profitable. Offering services for the broad spectrum of pet needs helps CVS generate as much revenue as possible from owners.

Since going public in 2008, the group’s earnings per share have grown steadily, fueled by acquisitions of small independent veterinary practices. By keeping acquisitions small, the risk of each individual deal is limited and new practices benefit maximally from the purchasing power of the broader group.

Acquisitions remain crucial, particularly in the more fragmented Irish and Dutch markets. The group is also open to entering new regions; and with less competition in Europe, offers on the continent are cheaper. Net debt to cash earnings is well below one, giving CVS the opportunity to jump into bigger deals as they appear. By targeting companies with valuation multiples of approximately 10 times earnings from acquisitions, well below what investors are currently willing to pay for CVS stock, these targets are well positioned to create shareholder value.

Better integration of acquired companies also allows for cost optimization and the group also pays attention to organic profit growth. Effective cross-selling services like Animed and the crematoria could increase sales at minimal cost. The Healthy Pet Club, which has 475,000 members and offers services and discounts to subscribers, should help with this.

The other thing to note is the relative resilience of CVS. The macroeconomic environment is uncertain. But people are willing to spend money on their pet’s health and would only stop as a last resort. That’s an advantage not all companies can match in the current climate.

For all the good things about CVS, it has one major weakness. The company relies on a constant supply of highly qualified professionals, and sometimes the supply was far from ready. The company has struggled to hire staff in the past, and subsequent wage increases have hit earnings growth and the stock price hard. While CVS has taken steps to mitigate this risk, it remains an industry-wide challenge as veterinary demand increases.

The CVS Group benefits from the growing pet industry. This is a structural change that we do not expect to change in the foreseeable future. That’s reflected in a high price-to-earnings multiple in the teens, which, while below its long-term average, suggests investors are still paying for the group’s strengths.

CVS Key Facts

  • Forward price-to-earnings ratio: 18.0
  • 10-year forward price-to-earnings average: 20.5
  • Projected dividend yield (next 12 months): 0.6%

Please remember that returns are variable and are not a reliable indicator of future returns. Remember, metrics shouldn’t be viewed in isolation—it’s important to understand the big picture.

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full year results

veterinary practices, the group’s largest division, saw sales rise 8.5% to £492.1m despite a weaker performance in the most recent quarter due to Covid-19. The Healthy Pet Club program, which offers routine flea and worming treatments and vaccinations as well as health checks, now has 475,000 members. Underlying cash profit (EBITDA) was £108.8m versus £98.4m.

The average number of employed veterinarians increased by 6%, with a record number of graduate veterinarians being hired. The rate of vacancies for veterinarians and nurses has remained “relatively constant”.

In which laboratories Business turnover was £27.2m compared to £28.0m last year. This is because results have been improved by one-off Covid testing over the past year. Excluding this, sales rose 1.1% this year. Underlying EBITDA was £8.3m versus £9.1m.

crematoria Revenue increased by £9.5m (2021: £8.0m) thanks to the newer direct cremation service. Underlying EBITDA rose by over 21% to £3.4m.

Animed Direct, CVS’s online pet food and pharmacy retailer, saw Online retail Revenue rose 11.8% to £46.6m, while underlying EBITDA rose 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 investments, up from £16.6m last year. Higher profits drove a further increase in free cash flow, which rose by a third to £52.0m. Net debt fell to £35.3m from £50.2m.

Learn more about CVS Group stocks, including investment opportunities

This article is original Hargreaves Lansdown content published by Hargreaves Lansdown. Unless otherwise noted, estimates, including expected returns, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Returns are variable and not guaranteed. Investments go up and down in value, so investors can lose money.

This article is not advice or a recommendation to buy, sell or hold any investment. No opinion is expressed as to the present or future value or price of any investment and investors should form their own opinions on any proposed investment. This article has not been prepared in accordance with legal requirements promoting the independence of investment research and constitutes a marketing communication. Non-independent research is not subject to FCA rules prohibiting trading prior to research, however HL has put in place controls (including trading restrictions, physical and informational barriers) to manage potential conflicts of interest arising from such trading. Please see our full non-independent research for more informations.

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