Veterinary services provider CVS (CVSG:AIM) scurries in with very resilient full year results and management sees a ‘very promising’ outlook for the business. Despite the squeeze on UK consumers’ disposable income, the Diss-headquartered concern says like-for-like sales growth has ‘remained robust since the year end’.
Yet the shares are off 2.8% at 994.5p as Brexit-induced European vet recruitment challenges continue to weigh on sentiment. Nevertheless, CVS believes its exposure to the potential impacts of Brexit ‘appears to be limited’ and says it has ‘not seen any significant impact on employment so far’.
DEMONSTRATING RESILIENCE
Results for the year ended 30 June from CVS, a recent addition to our running Great Ideas portfolio, reveal impressive 20.4% top line growth to a record £327.3m and solid 7.1% growth in adjusted profit before tax (PBT) to £36m.
The cash generative veterinary industry consolidator also declares an 11.1% hike in the dividend to 5p.
Last year, strong like-for-like growth of 4.9% was boosted by an exceptional performance from online drugs arm Animed Direct, with group sales enhanced by the acquisition of 52 surgeries.
In addition, CVS’ high quality Healthy Pet Club loyalty scheme operation continued to grow like topsy.
RISING TO THE CHALLENGE
However, CEO Simon Innes concedes that a number of acquisitions ‘have encountered the staffing challenges experienced in the wider business leading to a lower than anticipated level of sales. Conversely, some locations have taken on additional staff in anticipation of increased sales which have not materialised to the extent anticipated.’
Seeking to soothe sentiment, Innes also insists that ‘action has been taken to address the issues and the performance of the acquisitions is expected to recover to more normal levels in 2019.'
Addressing the Brexit threat, CVS says: ‘We have not seen any significant impact on employment so far but, together with other major employers in the industry and the Royal College of Veterinary Surgeons, we are lobbying the UK Government to mitigate against any such potential adverse impacts. Clearly, Brexit issues create some uncertainty for the pace of growth in the UK economy over the next couple of years, but the board believes that the characteristics of our business make it relatively resilient.’
Shore Capital’s Phil Carroll highlights a few points in relation to the read-across for veterinary market peer Pets at Home (PETS). The analyst has a ‘buy’ rating on Pets at Home, marked down 1.4p to 119.6p, which he views as an attractive UK retail sector play showing good signs of a recovery in its retail operations.
CVS’ results ‘look strong particularly in terms of the top line performance. The vet business within the group has grown revenue by 20% with like-for-like sales of 3% in the year compared to 5.2% in the prior year. Management continues to be highly acquisitive with 52 surgeries acquired in the year and a further 16 since the year end. This is interesting in the context that Pets has pulled back its roll-out programme on lack of availability of vets. We should highlight it operates a different model than CVS which wholly owns the practices it acquires whereas Pets enters a joint venture relationship with its vets.'
Carroll argues that CVS’ commentary around staffing challenges ‘seems to support Pets’ view on the lower availability of vets and we should add higher quality vets. As to why CVS did not the get sales anticipated when taking on additional staff, we believe this could be a local or specific practice issue given the like-for-like vets practices did not suffer the same issues. It also arguably highlights some potential issues in CVS’ acquisition strategy around quality of practices being acquired.'
And with CVS’ like-for-like sales remaining robust, ‘all in all we see a solid read-across for Pets in terms of sales demand as solid although it would appear quality vets are becoming harder to recruit which in fairness to Pets’ management is why it has scaled back its roll-out programme guidance from 40-50 to 20-25 practices per year.'
