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CVS Group - profits rise, CMA investigation in focus

Full year revenue rose 9.8% to £608.3m, including growth of 10.1% in the core Veterinary Practices division.

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Full year revenue rose 9.8% to £608.3m, including growth of 10.1% in the core Veterinary Practices division. There was like-for-like (LFL) revenue growth of 7.3% overall, which was slower than last year but in-line with targets.

Underlying cash profits (EBITDA) were up 13% to £121.4m, reflecting higher revenue and despite investment in facilities, tech and staff.

Despite an increase in capital expenditure, free cash flow was up to £62.9m from £52.3m.

The group entered the Australian market during the year. It also said its Vet practices are expected to deliver "year-on-year growth" in the new financial year, despite economic uncertainties.

CVS Group also highlighted it will "work closely with the CMA in support" of its investigation into the vet industry.

A final dividend of 7.5p per share was announced, up 7.1% on last year.

The shares rose 1.7% following the announcement.

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Our view

CVS Group owns and operates hundreds of vet practices throughout the UK, Ireland and the Netherlands. This is the main business, but the group also offers 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 business is an attractive business to be in. 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. Almost half a million of us are signed up to the Healthy Pet Club subscription service, which makes custom even stickier.

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.

Acquisitions remain key, especially in the more fragmented Irish and Dutch markets. The group's also open to entering new geographies. The latest is a foray into Australia, which we think has good potential. CVS's financial position, when measured by debt levels, gives it scope to pounce on larger deals as they emerge, and its discipline at the negotiating table means that acquisitions are well placed to create shareholder value.

This operating model also helps to keep costs down. That helps to keep free cash flow pumping round the company's veins, which in turn underpins the group's ability to pay dividends. No dividend is guaranteed.

There are some things to keep an eye on. The company relies on a ready supply of highly skilled professionals. The entire vet industry is grappling with a vet shortage, and the associated retention and recruitment costs are onerous. This is a trend that may well get worse before it gets better.

The other elephant in the (waiting) room is the Competition and Market Authority's (CMA) decision to launch an investigation into the vet sector.

A crackdown on cross-selling of services between partner practices and a probe on pricing are unwelcome but not insurmountable. 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).

The CMA's findings, due early 2024, will be the main driver of sentiment in the short-term. Underneath the investigation, CVS Group is a high-quality business with growth potential, and we think the recent valuation dent has been overdone. But the risks of ups and downs are heightened.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 21st September 2023