CVS Group’s half year revenue rose 11.4% to £329.9m. Like-for-like (LFL) growth of 6.0% was lower than last year, reflecting the effects of a weaker economic climate and cost of living pressures. Growth was still in-line with the group’s target range.
Operating profit fell 9.2% as a result of higher costs. CVS generated free cash flow of £23.8m, with net debt to cash profits (EBITDA) rising to 1.15 times, up from 0.73. The increase partly reflects the impact of acquisitions. The group bought fifteen practice sites in Australia over the period, with a pipeline of further deals.
The group is “mindful” of the challenging economic climate and potential impact on demand. It’s supporting the Competition and Markets Authority’s ongoing investigation into the veterinary sector.
No interim dividend was announced and CVS acknowledged that the amount of the final dividend will depend on the outcome of full year results.
The shares fell 4.3% following the announcement.
Our view
CVS is a one-stop shop for pet needs - the biggest business is its hundreds of vet clinics. But it also operates 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.
Half year results showed strong top and bottom-line growth, but markets have latched on to the outlook commentary which was a little sombre. Though, there was no change to actual guidance which we took as a positive.
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. Half a million of us are signed up to the Healthy Pet Club subscription service, which makes custom even stickier.
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 – though nothing 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 in the year, 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
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