CVS Group plc (CVSG) Ordinary 0.2p
HL comment (25 March 2021)
CVS Group saw sales rise 9.4% to £245.6m in the first half, while like-for-like (LFL) sales were up 7.8%. There was growth across all divisions, boosted by strong demand for services, procedures and online goods during lockdown. Underlying cash profits (EBITDA) rose 19% to £45.1m, reflecting the higher sales.
No interim dividend was announced, and a decision on a final dividend will be made with full year results. The group said the first two months of the second half have been positive, and four new practices have been acquired.
The shares were broadly flat following the announcement.
A whopping 40% of the UK owns at least one pet these days, and lockdowns led to a huge spike in demand for furry companions last year. As the saying goes, 'pets are for life'. Or, rather, 'a life of vet trips'.
That makes it a good time to be one of the UK's leading vet networks, like CVS Group. The group owns over 480 veterinary practices across the UK, Ireland and the Netherlands, three diagnostic laboratories and seven pet crematoria. They're supported by the rapidly growing Animed online veterinary pharmacy. As we shift to a more digital world there's reason to think this division will only build scale and become more profitable.
Since listing in 2008, group earnings per share have risen by 13.4% a year on average, fuelled by the acquisition of small independent vet practices. Keeping acquisitions small limits the risk of each individual deal, and new practices get maximum benefit from the wider group's buying power.
Acquisitions remain key, especially in the more fragmented Irish and Dutch markets. The group's also open to entering new geographies; and with less competition in Europe, deals on the continent are cheaper. That's why we're particularly encouraged to see net debt, as a proportion of cash profits, fall to just 0.72. It gives CVS the power to keep pouncing on attractive deals.
The group's also paying attention to organic profit growth.
Better integration allows costs to be streamlined. Effectively cross-selling services like Animed and the crematoria could boost sales at minimal cost. The 430,000-member Healthy Pet Club, which provides services and discounts to subscribers, should help on that front.
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.
Investors should also keep the valuation in mind. The market's reassessed its value of CVS Group upwards, no doubt excited by what the UK's pet-boom could mean for future revenues. But conditions are about as favourable as they'll ever be right now, so the group will have to peddle hard if it's to secure the level of growth the valuation demands. Overall, we admire CVS Group's position and growth opportunities - the group has a lot to offer, but investors are paying for that strength.
CVS key facts
- Price/Earnings ratio: 30.8
- Average Price/Earnings ratio since listing (2014): 17.8
- Prospective dividend yield (next 12 months): 0.4%
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.
Half Year results
Veterinary Practices, the group's largest division, saw revenue rise 7.2% to £218.2m. Like-for-likes (LFL) were up 5.5%, which was lower than 2020's 7.5%. Underlying cash profits were £45.8m, compared to £38.1m, reflecting a slight improvement in gross margin, and a reduction in the use of temporary staff. There was strong demand for services and treatments, as well as procedures, which were deferred from the first lockdown.
New client registrations are up about 17%, and revenue from the referrals business rose 20.6%.
The group's diagnostic Laboratory Division, saw a one-off boost by offering COVID-19 testing to third parties. This helped revenue rise 27.5% to £13.9m, while underlying cash profits were £4.1m (2020: £2.7m).
Crematoria revenues rose slightly to £3.9m (2020:£3.8m), reflecting higher value individual cremations. Underling cash profits were £1.4m (2020: £1.3m).
Animed Direct, CVS Group's digital pharmacy and retail business, was buoyed by strong demand, as spending shifted online during lockdown. Online sales of food rose 65%. Revenue grew to £19.7m, from £14.7m, but this division is less profitable at moment. That means underlying cash profits were only £1.4m, up slightly from 2020.
The Healthy Pet Club (the group's pet healthcare plan) now has 430,000 members, which is up 3.6%.
In the six month period, CVS Group acquired four new practices, for a total of £10.6m (net of cash needed).
Higher profits and a slight reduction in capital expenditure meant free cash flow rose to £31.5m, from £17.6m, compared to the same time last year. Net bank borrowings fell to £44.4m, down from £63.5m at the end of June 2020. That means net debt, as a proportion of annualised cash profits, is down to 0.72 times, against 1.14 times.
In the financial year to date, which includes the first two months of the second half, LFLs are up 8.2%.
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