CVS Group plc (CVSG) Ordinary 0.2p

CVS Group’s organic growth has slowed over the last financial year from 7.3% to 2.9%. That’s after the impact of a disruptive cyber security incident, and weaker demand in the UK. That was put down to a squeeze on consumers and wider publicity around the sector, presumably referring to the ongoing investigation by the Competion and Markets Authority.

The market investigation is expected to conclude by November 2025 with an interim update expected from the CMA in April or May 2025.

The underlying cash profit (EBITDA) margin is now expected to come in at 19%, the low end of guidance.

Net debt levels are expected to be 1.5x cash profits, around double the level seen at the previous year end but still within the targeted range.

The company’s spending priorities are broadly unchanged but its acquisition focus is expected to be firmly on Australia where it bought 22 businesses in the last financial year.

The shares were down 1.3% following the announcement.

Our view

The UK’s Competition and Market Authority (CMA)’s ongoing investigation into the veterinary industry raises serious questions about CVS Group’s future prospects. But the reputational damage to the industry is also a contributing factor to the current slowdown in growth being seen in its biggest market.

A cybersecurity incident also caused significant disruption. The group's ability to still achieve organic growth in the midst of these challenges is testament to its resilience. But until the outcome of the CMA investigation is known, there will remain a high degree of uncertainty around the outlook.

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).

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 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. 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, with the focus now firmly on 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, but the balance sheet could come under a little pressure if the current softness in demand persists. Given the demands that acquisitions place on cash, we’re not expecting huge growth in the modest dividend. As ever no shareholder payouts can be guaranteed.

Underneath the regulatory scrutiny, the current valuation is now well below the long-term average. We feel this represents an opportunity for investors with a higher risk tolerance to invest in a top-quality business that has growth potential. Keep in mind though, the potential for ups and downs remain heightened until the CMA gives a steer on its recommendations, and that’s not expected until April 2025 at the earliest.

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