CVS Group’s like-for-like sales have been flat over the first four months of this financial year, owing to soft demand in the UK. Underlying cash profit (EBITDA) increased by 5.5%.
The group expects to deliver full-year results in-line with market expectations, which have fallen slightly since the publication of full-year results back in late September. Market consensus now expects revenue of £696.7mn and cash profit of £137.7mn.
So far this year CVS has made three acquisitions in Australia.
Next year, the estimated negative impact from recent changes to the UK’s national insurance scheme stands at £8mn.
The shares rose 3.0% in early trading.
Our view
CVS Group, the veterinary services provider, isn’t finding things any easier so far this year in its core UK market. Nonetheless investors have taken some much-needed reassurance from news that profits are still growing, and analyst forecasts remain in reach.
Reputational damage from the UK’s Competition and Market Authority (CMA)’s investigation into the industry has been called out as a major contributor to flagging demand.
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, although there are some signs that membership is plateauing.
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 pushing 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 average, with an absence of policies and programmes in some key areas. 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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