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CVS Group - sales rise despite recruitment challenges

Nicholas Hyett, Equity Analyst | 24 November 2021 | A A A
CVS Group - sales rise despite recruitment challenges

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CVS Group plc Ordinary 0.2p

Sell: 1,787.00 | Buy: 1,790.00 | Change 25.00 (1.42%)
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CVS has reported a strong start to the new financial year, with sales up 13.8% in the four months to 31 October and like-for-like sales of 12.4%.

Underlying cash profit margins have improved from 18.7% last year to 19.2% this year. Net debt remains below one times underlying cash profits.

The group continues to see vacancies increase as it looks to recruit more vets to meet increasing customer demand. The number of vets employed by the group has continued to increase, including the highest ever intake of new veterinary graduates.

The shares were broadly flat in early trading.

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Our View

There are now over 24m cats and dogs in the UK, 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 vet trips'.

That makes it a good time to be one of the UK's leading vet networks, like CVS Group. The group has 506 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. As we shift to a more digital world there's reason to think this division will only build scale and become more profitable.

Since listing in 2008, group earnings per share have grown steadily 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. Net debt, as a proportion of cash profits, is well under one, giving CVS the power to pounce on any larger deals as they emerge.

The group's also paying attention to organic profit growth. Better integration allows costs to be streamlined. Effectively cross-selling services like Animed and the crematoria could boost sales at minimal cost. The 455,000-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, vacancies have been on the rise and it remains an industry wide challenge as veterinary demand increases.

Investors should also keep the valuation in mind. The market's reassessed its value of CVS Group upwards, no doubt excited by what the UK's pet-boom could mean for future revenues. But conditions are about as favourable as they'll ever be right now, so the group will have to peddle hard if it's to secure the level of growth the valuation demands. We admire CVS Group's position and growth opportunities, but investors are paying for that strength.

CVS key facts

  • Price/Earnings ratio: 29.3
  • Ten year average Price/earnings ratio: 19.4
  • 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.

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Full Year Results - 23/09/21

Revenue rose 19.2% to £510.1m for the full year, while like-for-like sales rose 17.4%. That reflects growth in all divisions and "favourable market dynamics", including increased pet ownership in the UK over lockdowns.

The higher revenue fed into a 37.3% rise in underlying cash profits (EBITDA), to £97.5m. Operating profit came in at £40.1m, up from £18.5m following the non-recurrence of coronavirus related impairments last year.

CVS Group announced a final dividend of 6.5p, after dividends were suspended last year.

The group's Veterinary Practices, which make up 89% of CVS' revenue, saw like-for-like (LFL) revenue rise 15.9% to £453.4m. Total revenue growth was up 18%, helped by acquisitions. The group made nine acquisitions in the year across 15 practice sites, and a further 8 since the year end. Underlying cash profits of £98.4m rose 36%.

The Laboratories business is facing the loss of some external clients because of increased consolidation in the sector. Despite this, revenue rose from £21.1m to £28m, and underlying cash profits rose from £5.8m to £9.1m.

Crematoria revenue rose 11.1% to £8m, while underlying cash profits rose from £2.5m to £2.8m.

Online Retail (Animed Direct), which sells food and prescription medicines plus other products, saw revenue rise 29.9% to £41.7m, helped by an increase in demand for online shopping, despite the reopening of physical shops. Underlying cash profits rose 16% to £2.9m.

The group employed an average of 181 (10.2%) more vets and 189 (8.0%) more nurses than in the year ended 30 June 2020. It continues to advertise for new positions.

CVS Group generated free cash flow of £39m, down from £55.4m last year, reflecting the payment of deferred VAT bills. Net debt fell 19.2% to £50.2m.

In the first two months of the new financial year, total sales have grown 17.5% thanks to price increases in July.

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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.

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.

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