CVS Group plc (CVSG) ORD GBP0.002

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CVS Group first half sales grew by 5.8% to £357mn, driven by like-for-like growth of 2.7% and contributions from acquisitions.

Underlying cash profit (EBITDA) grew by 3.9% to £68mn driven by top-line growth, but higher employment costs saw the margin fall from 19.3% to 19.0%.

Free cash flow was up 16.2% to £34mn. Since the year end, net debt has grown £29mn to £158mn largely due to continued investment in acquisitions.

Despite ‘softer’ UK market conditions, CVS Group remains confident of meeting this year’s market expectations for underlying cash profit of £142mn , broadly unchanged since the last trading update.

The shares fell 3.9% in early trading.

Our view

CVS Group put in a decent set of first-half numbers. But higher costs and sluggish demand in the core UK market mean that it's relying on its Australian acquisitions to do much of the heavy lifting. Investors appeared somewhat disappointed not to see clearer signs of green shoots on home turf.

The provisional outcome of the Competition and Markets Authority investigation into the UK veterinary industry removes some doubts about the competitive environment, but we caution that the final report could still include more demanding measures.

A lull in activity during the regulatory probe could provide a favourable market for consolidators like CVS, and the company’s hinted that the investigation’s conclusion could herald a reboot of acquisitions in the UK. Management is also hopeful that its vets will be less hesitant about offering clients more advanced treatment options, which could be a further positive for revenue growth.

The group’s 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. Following a pandemic-driven boom, the pet population has stabilised, but as these animals age, they’re likely to require more veterinary care.

Acquisitions remain key, with the focus currently on Australia, where similarities with the UK market should allow smooth integration into the group. However, one notable difference is that practices down under tend to be larger, which is beneficial for margins.

Net debt levels should provide at least some headroom for further deals, though the pace of investment suggests little scope for meaningful increases to modest shareholder payout levels in the near term.

We see CVS as a high-quality business in an attractive market. The shift in focus to Australia looks like a good move, and the risks of draconian regulatory intervention appear to be much reduced. If the company meets market expectations, we see scope for modest near-term upside, with anything beyond that dependent on a sustained recovery in demand.

But there’s still some work to be done in the second half if CVS is to make this year’s forecasts. With headwinds still blowing in the group’s biggest market, further disappointments can’t be ruled out.

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. Issues of note include poor disclosures, resulting in substandard accountability to investors and the public. Whilst the CMA investigation is nearing completion 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.

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.

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