Operating veterinary practices in a nation that often seems to prefer domestic animals to people should be a great way to make money. With pooches pampered and cats fawned upon, it is a mystery why CVS does not make fatter profit margins as it hoovers up the competition. In reality, pet owners are price conscious and the advent of online animal medicine pharmacies and pet services has exposed the company to fierce competition. However, results for 2011-12 show signs of a concerted fightback and, if the operational improvement continues, then CVS will consign its status as a dog share to the past.
- Loyalty schemes generate stable revenues
- e-commerce picking up
- Dividend hiked
- Good cash-flow generation
- Internet competition still a threat
- High borrowings
The main problem confronting the company was how to compete against e-commerce companies. The answer for CVS is to offset their impact by demonstrating the value of customer loyalty schemes within its 223 surgeries, which can generate stable revenues. The CVS loyalty scheme more than doubled the number of participants in its "Healthy Pet Club" scheme to 65,000 in 2011-12. In the process, it allowed the company to cross-sell to pet owners from across its range of clinical services and produced the added benefit of insulating its sales of medicines from online competition. Finding niches has been the key to attracting sign-ups; for example, the "Kitten Club" is not a cabaret venue in Weimar Germany but a specialist service for owners of young cats. Such is the success of 'pet-club' schemes that monthly subscription revenues doubled to £5.2m in 2011-12.
CVS (CVSG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 154p | MARKET VALUE: | £87.3m | |
| TOUCH: | 151-154p | 12M HIGH: | 154p | LOW: 95p |
| DIVIDEND YIELD: | 1.1% | PE RATIO: | 29 | |
| NET ASSET VALUE: | 36p | NET DEBT: | 152% | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 86 | 3.84 | 5.7 | nil |
| 2011 | 101 | 4.25 | 6.2 | 1.00 |
| 2012 | 109 | 3.77 | 5.1 | 1.50 |
| 2013* | 112 | 5.20 | 4.2 | 1.58 |
| 2014* | 116 | 6.10 | 5.3 | 1.65 |
| % change | +4 | +17 | +26 | +4 |
Normal market size: 2,000 Matched bargain trading Beta: 0.4 *Investec Securities forecasts | ||||
CVS's entry into e-commerce also showed signs of bearing fruit. Sales at its online pharmacy arm, Animed Direct, more than tripled to £3m, although some City analysts question the aggressive pricing that keeps the division's profit margins so low; that said, e-commerce is generally low-margin. Still, across the whole group, an increase in like-for-like sales of 2.9 per cent in 2011-12 marks an encouraging return to growth.
True, CVS's balance sheet carries a lot of debt as the company expands by acquiring individual vets' practices, though there are signs of a structural improvement, with net debt falling by £2.6m to £30.9m during the year. This is a positive sign that the underlying business can generate enough cash both to reduce debt and to raise dividends. True, cash profits dropped 12 per cent to £15m, but that was a result of carrying extra working capital. Meanwhile, free cash flow of £7.2m was plenty to cover £3.8m-worth of acquisitions and £0.6m-worth of dividends.
