CVS Group plc (CVSG) Ordinary 0.2p

CVS Group has responded to the (CMA) Competition and Markets Authority’s (CMA) decision to provisionally launch a formal Market Investigation into the veterinary sector, after an initial review.

The initial review raised concerns over a lack of competition and access to information by the public, as well as pricing.

There will now be a four-week consultation before the CMA decides the best course of action.

During the review, CVS and, together with certain other corporate groups put forward a package of possible remedies to address its the concerns. The group believes this package could address the CMA's concerns more quickly than an 18-month investigation.

The shares were down 21.5% in early trading.

Our view

Last September, CVS Group’s veterinary practices came under the spotlight of the UK’s Competition and Market Authority (CMA). Investors have now taken fright at the proposed formal investigation. A more in-depth review was not totally unexpected.

A potential crackdown on cross-selling of services between partner practices and a focus on pricing are unwelcome but not insurmountable. A forced sale of some of some operations also can’t be ruled out. But 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). If the industry can address concerns head-on, a more drawn-out process could still be avoided, but there can be no assurance of this.

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.

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. Given the demands this places on cash, we’re not expecting huge growth in the modest dividend. As ever no shareholder payouts can be guaranteed.

The entire industry-wide shortage of qualified vets is one thing to keep an eye on. This has the potential to hold back growth and put upward pressure on costs, but for now trading remains resilient.

We think the recent valuation dent has been overdone. Underneath the regulatory scrutiny, the group is a high-quality business with growth potential. But the risks of ups and downs remain heightened, with the outcome of the consultation due in April likely to be the main near-term valuation driver.

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