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CVS Group - organic growth at upper end of targets

In its half year trading update CVS revealed that revenue had climbed from 273.7m to 296.3m pounds.

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In its half year trading update CVS revealed that revenue had climbed from £273.7m to £296.3m. This was underpinned by like-for-like growth of 7.5%, at the upper end of the Group's 4 to 8 percent target range.

Underlying margins on cash profits were 19%, in line with the prior year.

CVS has made six acquisitions so far this financial year, with the total upfront consideration now totalling £26.5m.

Net debt increased from £36.0m to £57.6m over the 6 months to December, driven by the acquisition spend as well as investment in existing sites.

The Group remains mindful of the challenging economic backdrop, but noted that demand for veterinary care remains resilient. CVS is exploring further acquisition opportunities both in the UK and overseas.

The shares were broadly unmoved in afternoon trading.

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Our View

Pet numbers have boomed in the UK over recent years. That puts CVS Group - a leading vet network - in a good position.

The group operates hundreds of 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. We expect this division will only build scale and become more profitable. Offering services across the broad spectrum of pet needs helps CVS capture as much revenue from owners as possible.

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. By targeting companies with valuation multiples of around 10 times earnings on acquisitions, well below the ratio investors are currently prepared to pay for CVS shares, these bolt-on targets are well placed to create shareholder value.

Better integration of acquired businesses allows costs to be streamlined too, plus the group's also paying attention to organic profit growth. Effectively cross-selling services like Animed and the crematoria could boost sales at minimal cost. The 481,000-member Healthy Pet Club, which provides services and discounts to subscribers, should help on that front.

The other thing to point out is the relative resilience of CVS. The macroeconomic environment is uncertain. But people are willing to spend money for the sake of their pet's health, and would only stop doing this as a last resort. That's a benefit not all companies can boast in the current climate.

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 as veterinary demand increases.

CVS Group is a beneficiary of the growing pet industry. This is a structural shift which is unlikely to change any time soon in our opinion. That's reflected in a 20 times price to earnings ratio, in line with the longer-run average, suggesting that investors are still paying for the group's strengths.

CVS key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 26th January 2023