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CVS Group - positive trends in the first half

Sophie Lund-Yates, Equity Analyst | 29 January 2021 | A A A
CVS Group  - positive trends in the first half

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CVS Group plc Ordinary 0.2p

Sell: 2,480.00 | Buy: 2,490.00 | Change 60.00 (2.47%)
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CVS Group saw sales rise 9.4%, to £245.6m in the first half. That reflects a 7.8% increase in like-for-like sales, with momentum in all divisions, and the recognition of its "Healthy Pet Club" revenue, after it was deferred during lockdown.

Underlying cash profit (EBITDA) margins have risen to 15.2% from 13.4%. That was driven by the improved sales, and the group expects to report half year underlying EBITDA of around £37.3m. That's a 23.9% increase on 2020.

The shares were unmoved following the announcement.

Find out more about CVS shares including how to invest

Our View

A whopping 40% of the UK owns at least one pet these days, and lockdowns led to a huge spike in demand for furry companions last year.

As the saying goes, 'pets are for life'. Or, rather, 'a life of multiple trips to the vet'.

That makes it a good time to be one of the UK's leading vet networks, like CVS Group. The group owns over 480 veterinary practices across the UK, Ireland and the Netherlands, three diagnostic laboratories and seven pet crematoria. They're supported by the rapidly growing Animed online veterinary pharmacy. This isn't only a positive as we shift to a more digital world - it's also very lucrative, with a high proportion of each Animed sale falling straight through to profit.

Since listing in 2008, group earnings per share have risen by 13.4% a year, fuelled 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. That's why we're particularly encouraged to see net debt, as a proportion of cash profits, fall to under 1.0. It gives CVS the power to keep pouncing on attractive deals.

The group's also paying attention to organic profit growth.

Better integration allows costs to be streamlined. Effectively cross-selling services like the more profitable Animed and the crematoria could boost sales at minimal cost. The 430,000-member Healthy Pet Club, which provides services and discounts to subscribers, should help on that front.

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.

Investors should also keep in mind growth is likely to temper in the second half, as lockdowns limit the number of procedures allowed. This should hopefully be a blip, rather than a crisis, but it's something to keep in mind.

Looking further down the path, we think CVS Group is in a great position to benefit from increased pet ownership. The group has a lot to offer, and we're excited by its prospects. But a higher than average price to earnings ratio means investors are paying for that strength.

View the latest CVS share price and how to deal

CVS key facts

  • Price/Earnings ratio: 25.8
  • Average Price/Earnings ratio since listing (2014): 17.5
  • Prospective dividend yield (next 12 months): 0.4%

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.

Half Year trading update

Performance was boosted by growth in the core vet Practices division, and increased demand for its online pharmacy and retail business, Animed Direct. Within Practices, total sales rose 7.1%, while like-for-likes (LFL) were up 5.4%. The group saw an increase in new client registrations. CVS introduced its planned price increases, which had been deferred because of coronavirus, on 1 January 2021.

The Healthy Pet Club (the group's pet healthcare plan) saw membership rise 3.6% to 430,000. Now that treatments and procedures have resumed, £6m in deferred revenue was recognised this half.

Employment costs as a percentage of sales fell slightly to 48.9%, from 51.0% this time last year. That reflects a "stable" rate of vet vacancies. CVS introduced a pay rise, broadly in line with inflation.

Four acquisitions were made between November and December, which equalled seven animal practice sites across the south and south west.

CVS Group said all its practices remain open, as the current lockdown allows for some non-emergency procedures to be carried out, unlike the restrictions seen in March 2020.

As at the end of December 2020, the group has net bank borrowings of £44.4m, which is equal to 0.72 times cash profits.

The group said: "although the Board remains cautious given the current level of macro uncertainty, particularly in light of the recent UK lockdown restrictions, the improved performance has been maintained across all operations during the first half".

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.