CVS Group reported full-year revenue of £647.3mn, reflecting like-for-like growth of 2.9%.
Underlying cash profit (EBITDA) was up 4.7% to £127.3mn. The margin decreased 0.9 percentage points to 19.7% driven by wage and utility inflation and increased headcount.
On a reported basis, profits were negatively impacted by exceptional costs relating to a cyber breach and the ongoing industry investigation by the Competition and Markets Authority. The Group also recognised a £20mn loss on the disposal of its Dutch and Irish operations.
Free cash flow fell from £69.7mn to £62.0mn, reflecting lower levels of cash generated from operations. Net debt more than doubled to £164.8mn, driven by acquisition spending which was largely deployed in Australia.
The group is comfortable with consensus expectations for this year, which forecasts revenue of £710.2mn and cash profit of £138.4mn.
The final dividend was raised by 0.5p to 8.0p per share.
The shares were up 5.3% following the announcement.
Our view
CVS Group has managed to deliver a respectable set of final results, in what was a challenging year. A cybersecurity breach hit profits by around £6mn, but more worryingly the UK’s Competition and Market Authority (CMA)’s launched an investigation into the competitive practices across the industry. The resulting reputational damage to the industry has been a major contributor to the current slowdown in growth being seen in its biggest market.
A potential crackdown on cross-selling of services between partner practices and a focus on pricing are unwelcome but not insurmountable. A forced sale of some of some operations also can’t be ruled out. But we remain hopeful that changes will need to be relatively minor, like making group branding more obvious (when CVS buys smaller clinics it currently tends to keep the original branding).
CVS is a one-stop shop for pet needs - the biggest business is its hundreds of vet clinics. But it also operates cremation services and an online pharmacy - Animed. There's a product or service available for pet owners at every stage of their pet's life.
The veterinary sector certainly has its attractions. People will spend on their furry companions, especially when it comes to health, no matter what's going on in the economy. The pandemic has seen pet ownership increase massively too.
And not only this, but the way we treat our animals is playing into the hands of vets. So-called humanisation of animals means we're more willing to part with cash on check-ups and treatments for every sniffle and tummy upset. Half a million of us are signed up to the Healthy Pet Club subscription service, which makes custom even stickier.
Acquisitions remain key, with the focus now firmly on Australia, which we think has good potential. The similarities with the UK market should allow relatively smooth integration into the group.. The acquisition drive has been driving up debt levels. There’s still headroom to make further deals, but if it wants to pick up the pace, the group may need to look at further financing options. With that in mind, we’re not expecting huge growth in the modest dividend. As ever no shareholder payouts can be guaranteed.
Underneath the regulatory scrutiny, the current valuation is now well below the long-term average. We feel this represents an opportunity for investors with a higher risk tolerance to invest in a top-quality business that has growth potential. Keep in mind though, the potential for ups and downs remain heightened until the CMA gives a steer on its recommendations, and that’s not expected until May 2025 at the earliest, with a final report due towards the end of the year.
Environmental, social and governance (ESG) risk
The healthcare industry is largely medium-risk in terms of ESG, with companies in Europe and the US trending toward the lower end of the spectrum due to more stringent regulations. Risk also varies by subindustry, with Pharmaceuticals categorised as medium/high risk due to higher exposure and weaker management. Across the board, product governance is the most acute risk, with business ethics, labour relations and data privacy also contributing. Providing reasonable access to healthcare as a basic service is also a growing issue, with greater concerns surrounding the social implications of for-profit healthcare companies.
According to Sustainalytics CVS Group’s management of ESG risks is weak overall. Issues of note include poor disclosures, resulting in substandard accountability to investors and the public. Whilst the CMA investigation remains underway we see business ethics as a key ESG risk to be mindful of. Given the group’s reliance on highly skilled veterinary practitioners, labour relations and with it talent retention and attraction are also an area to watch.
CVS Group key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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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