CVS Group’s full-year revenue of £673mn landed in line with recent company guidance. Growth of 5.4% was delivered almost entirely by acquisition activity in Australia as trading conditions softened across the group.
Underlying cash profit (EBITDA) was up 9.4% to £135mn, helped by tight cost control.
Underlying fee cash flow increased from £59mn to £72mn, of which £29mn was absorbed by acquisitions. Net debt improved from £165mn to £129mn, helped by the £42mn sale of the Crematoria business.
The Competition and Market Authority’s (CMA) provisional decision on the UK veterinary market investigation has been further delayed and is expected in the coming weeks.
This year CVS expects to meet market forecasts of £713mn for revenue and £141mn for underlying cash profit.
The final dividend was raised by 0.5p to 8.5p per share.
The shares rose 6.4% in early trading.
Our view
With the headline numbers pre-announced there was little scope for surprise in CVS Group’s final results. However, investors responded positively to emerging signs of a recovery in the UK, and a reasonable outlook for the current financial year. The ongoing regulatory probe by the CMA continues to drag, but a conclusion looks to be in sight.
Initial proposals from the UK investigation didn’t look too taxing. The potential for price controls appeared to be focused on cremations - a part of the business the group has disposed of. It could also see the company resume acquisition activity in the UK. However, there remains a possibility that pressure from consumer groups could see some tougher measures introduced.
CVS is a one-stop shop for pet needs - the biggest business is its hundreds of vet clinics. But it also operates an online pharmacy – Animed, and a Laboratory division that provides diagnostic services. The veterinary sector certainly has its attractions. 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. Half a million of us are signed up to the Healthy Pet Club subscription service, which makes custom even stickier.
Acquisitions remain key, with the focus now firmly on Australia, where similarities with the UK market should allow smooth integration into the group. The recent sale of the Crematoria has made a welcome dent in the company’s debt levels, freeing up significant headroom for further deals. Meanwhile, the modest dividend yield looks to be well covered by cash flows. Of course, no shareholder payouts can be guaranteed.
We see CVS as a high-quality business in an attractive market. Despite a strong recovery so far this year, the current valuation is still well below the long-term average. But for sentiment to rally further we think growth rates need to recover towards historical levels. There are some signs things are moving in the right direction. But a challenging UK economy and pending investigation means there could well be a bumpy ride ahead.
Environmental, social and governance (ESG) risk
The healthcare industry is largely medium-risk in terms of ESG, with companies in Europe and the US trending toward the lower end of the spectrum due to more stringent regulations. Risk also varies by subindustry, with Pharmaceuticals categorised as medium/high risk due to higher exposure and weaker management. Across the board, product governance is the most acute risk, with business ethics, labour relations and data privacy also contributing. Providing reasonable access to healthcare as a basic service is also a growing issue, with greater concerns surrounding the social implications of for-profit healthcare companies.
According to Sustainalytics, CVS Group’s management of ESG risks is average overall.
Issues of note include poor disclosures, resulting in substandard accountability to investors and the public. Whilst the CMA investigation remains underway we see business ethics as a key ESG risk to be mindful of. Given the group’s reliance on highly skilled veterinary practitioners, labour relations and with it talent retention and attraction are also an area to watch.
CVS Group key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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 LSEG. 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.