Pets at Home holds onto animal ownership boom

A meteoric rise in pet ownership among the house-bound masses during the pandemic turned Pets at Home (PETS) into a solid winner over the past two years. However, easing restrictions and the return to working in offices have prompted a one-third drop in shares to over the past 12 months. 

This has not materialised so far, and Pets at Home’s customers have maintained higher spending, while registrations into its ‘Puppy and Kitten club’ continue well above pre-pandemic levels. Ongoing themes of “pet humanisation” - animals being considered as family members - and more affluent owners being prepared to fork out for premium products, meant Pets at Home expects to keep growing underlying pre-tax profit to £131mn in 2023, compared to £126.4mn in the year to 31 March.

While “not immune” to inflationary pressures from raw materials, energy, and freight costs, the company expects to keep pricing “competitive” by pushing for rent reductions and also sourcing domestically, which already accounts for 80 per cent of its costs. 

Profit margins rose to 9.9 per cent in 2022, from 6.8 per cent a year earlier. As expected, vet revenues slipped 12 per cent to 108.4mn after the disposal of five specialist practices. They were still up by 24 per cent up on a 2-year like for like basis, and punched well above their weight, representing a third of profits.

Broker Numis considers Pets at Home “meaningfully undervalued” with a current forward PE of 12, as three-quarters of its sales are within the non-discretionary bracket and look less likely to be caught out by negative consumer sentiment. A 48 per cent increase in dividends and a £50mn share buyback programme won’t go amiss either. Upgrade to Buy.

Last IC View: Hold, 478p, 23 Nov 21.