CVS and Animalcare benefit from lockdown pet boom

Caring for a pet is for life, not just for lockdown. Not everyone who rushed to buy one over the past year may have considered that; as pet sales boomed, the Dogs’ Trust warned that up to 40,000 canines were at risk of eventually being abandoned.

The short-term thinking of many new pet-owners is also underscored by figures obtained from the government by the Investors’ Chronicle, which show that recorded incidents of “illegally landed” dogs rose from 332 in 2019 to 1,749 in 2020, as demand spurred increased thefts. 

How long people remain committed to caring for their new puppies once lockdown is over may be debatable, but one of the immediate beneficiaries of the pet frenzy has been the animal care sector.

Vet operator CVS (CVSG) reported a rise in adjusted pre-tax profits of more than a third during the six months to December. 

Similarly, veterinary equipment provider Animalcare (ANCR) said that sales rose 3 per cent in the final half of 2020, to £36m. Revenues for the full year were down 1 per cent, largely due to the closure of veterinary practices during the early stages of the pandemic, although the company swung to its first pre-tax profit in three years as it slashed expenses.

Shares in both CVS and Animalcare have surged over the past year, as investors bet the pet boom is here to stay. But can the listed animal sector really continue to roar once lockdown ends?

CVS has to be wary of more than just fickle pet owners. The veterinary sector is particularly dependent on European workers; in 2017/18, 48 per cent of new UK vets came from EU schools. In November, the British Veterinary Association warned that the industry could face a shortage of workers after Brexit.

CVS chief executive Richard Fairman said the company has recently been focusing on recruitment. The vacancy rate for vets had fallen to 7.5 per cent at the end of December, from 12.5 per cent in 2018. The group said increasing the proportion of full-time staff has also lifted profit margins, as it is now less dependent on higher-cost freelancers.

Animalcare, meanwhile, is still dogged by the fallout from an unpopular acquisition in 2017. The takeover immediately sent its market value tumbling, as investors doubted the benefits of the high-cost move; its share price remains almost half the level at its peak. Yet since then, the company has been cutting debt and increasing the amount of cash it generates from operations. Net debt stood at just 1.1 times adjusted cash profits at the end of last year. 

Despite concerns about new dog-owners abandoning their lockdown companions, most people will also probably continue to care for their pets over the coming decade. Continued homeworking may sustain demand for furry friends and as CVS points out, there will only be more need for its services as these puppies get older. A valuation of 44 times earnings seems pricey, but our long-term view remains optimistic. Buy at 1,851p.

Last IC view: Buy, 1,170p, 24 Sept 2020

Last IC view: Hold, 196p, 25 Sept 2018