CVS aims to dominate in animal health

CVS's bosses are not alone in identifying the attractions of the marketplace. In the past few years private-equity-backed firms, including Independent Vetcare and Vet Partners, have been building portfolios of veterinary practices, which has increased competition and raised the price of practices. That said, 77 per cent of the UK market remains independent and in the second half of 2016 CVS acquired 16 UK vets practices. Management has also started to look overseas for opportunities and now owns six vets practices in the Netherlands. By 2022, broker N+1 Singer expects CVS to own 18 per cent of the UK veterinary marketplace and 5 per cent of that in the Netherlands.

As well as the opportunities for growth via acquisitions, the animal healthcare market is attractive and expected to grow at roughly 5 per cent a year for the next decade. In the so-called 'companion-animal' market that's because increasing take-up of pet insurance means that owners are much happier to see money spent on their animals' well being. Meanwhile, the greater demand for meat - and the rising cost of rearing it - puts a greater value on healthy livestock. Applying these factors to CVS's possible growth indicates that the group's earnings could more than double in the next five years.

CVS has excellent exposure to all the veterinary marketplace. Its practices division - the vast majority of group revenue - does not just involve owning and running vets practices. CVS also develops and sells its own medicines and accessories and runs a pet-health scheme, which has almost 300,000 members. In this division, a 30 per cent increase in revenue to £118m in the six months to December 2016 was largely driven by the newly acquired practices, but like-for-like sales also continued to tick upward by 7 per cent. This division made £22m of adjusted cash profits, thanks to the revenue growth and improvement in gross profit margins to 80 per cent.

The remaining 9 per cent of group revenue is made up of the group's diagnostic laboratory business, its crematoria services and its online drugs dispensary, Animed Direct. All three divisions reported revenue growth in the first half of 2016-17 and modest increases in underlying cash profits. To add further bulk to CVS, management will soon launch a pet insurance service, for exclusive use in their own practices.

Financially there is also a lot to like about CVS. Conversion of accounting profits into cash is high - £9.5m of operating profit became £12m of operating cash flow in the first half of 2016-17. The balance sheet has been buttressed by a £30m share placing in December - although CVS's pace of expansion implies further diluting share issues are likely in the future. At its current debt level, CVS has £47m of headroom in its lending facility, but broker N+1 Singer forecasts that the group will generate £12m of free cash flow in the second half of the financial year, meaning it has more than £60m of firepower for acquisitions in 2017.