CVS Group plc (CVSG) ORD GBP0.002

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CVS Group’s CEO is retiring due to personal reasons. Richard Fairman, who has held the role since 2019, intends to stay on until a successor has been appointed.

The shares fell 2.7% following the announcement.

Our view

CVS Group’s announcement of its CEO’s intention to retire has added to the downward pressure that the shares have been facing this year.

The 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 final result of the Competition and Markets Authority probe into the veterinary industry didn’t contain any overly punitive measures. Consolidation in the UK has been muted during the investigation, and its conclusion could reopen the door for CVS’s buy-and-build strategy at home, in what is likely to be a buyer’s market.

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 with the overhang of regulatory intervention now effectively removed, we think there’s scope for sentiment to recover. But there’s still some work to be done in the second half if CVS is to make this year’s forecasts. Investors will also be hoping that a credible candidate for the CEO post will be found sooner rather than later.

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. The CMA investigation highlighted business ethics as a key ESG risk to monitor with reform of the Veterinary Services Act the next important change to keep an eye on. Given the group’s reliance on highly skilled veterinary practitioners, labour relations and with it talent retention and attraction are also areas 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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