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CVS Group - shares drop amid CMA investigation

The Competition and Markets Authority (CMA) has launched an investigation into the veterinary services sector.

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The Competition and Markets Authority (CMA) has launched an investigation into the veterinary services sector.

The review will look at how vet services are bought and sold, the availability of information when making treatment decisions, and whether pet owners are getting a fair consumer experience. A specific concern is that the cost of vet services has risen faster than the rate of inflation.

CVS Group has said it "always works closely with" regulators, and that higher prices reflect higher staff costs.

The shares fell 29.1% following the announcement

First half results (4 February 2023)

CVS Group saw like-for-like (LFL) revenue rise 7.5% in the first half, but this was 2.1% lower than the rate of growth seen last year. Reported revenue, which includes the effect of acquisitions, rose £20m in CVS Group's biggest division, Veterinary Practices, reaching £263.4m.

Membership of CVS Group's preventative healthcare scheme, Healthy Pet Club, rose to 481,000, up 4.3% compared to the previous year.

Underlying cash profits (EBITDA) were £57.8m, up 11.2%.

The group's net debt position remains well below 1 times cash profits and £17m of free cash flow was generated. £24.4m was spent on acquisitions in the half, on eight vet practice sites.

The group expects full year results to be in line with market expectations and continues to target 4-8% like-for-like growth.

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Our view

The Competition and Markets Authority's decision to launch an investigation into the vet sector has unnerved the market.

This is understandable to a degree. A crackdown on cross-selling of services between partner practices as well as a probe on pricing are all unwelcome. 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). If ramifications are less severe than feared, the recent market reaction may well be overdone.

The full extent of changes required won't become clearer until the CMA serves up its findings early next year. Sentiment is likely to remain negative until there's more clarity. But until we have that detail it's important to focus on the core business.

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.

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. 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.

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.

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. We continue to think the group has strength. But with acquisitions such an important part of the story, the CMA's findings will be the driving force of market sentiment in the near-term at least.

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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: 7th September 2023