Vet group CVS reports strong growth in face of looming CMA review

Shares in veterinary services provider CVS Group (CVSG) plummeted 30 per cent earlier this month when the CMA announced a forthcoming review of the pet healthcare sector. The regulator’s statement on the investigation was light on detail, saying only that it’d be “exploring how well the market is working for pet owners”. 

Some investors must therefore be wondering whether the market’s reaction is out of proportion to the intervention at hand. CVS’s full-year results – which show growth across top and bottom-line metrics – should give concerned shareholders enough to feel optimistic about. 

In addition to revenue and profit growth, the group also reported an expansion in its Ebitda margin from 19.4 per cent in FY2022 to 20 per cent. Capital expenditure almost doubled across the 12 months to the end of June, although leverage remained under one times Ebitda – comfortably below the company’s target of two times or under. 

Interest costs are predicted to be higher in the current financial year as the company draws on its debt facilities to drive additional growth, but this is expected to be offset by higher R&D tax credits and acquisitions. 

The veterinary sector has historically proved resilient during economic downturns, as consumers tend to prioritise the health of their pets over other forms of discretionary spending. This leaves companies such as CVS in a strong position should the macroeconomic picture fail to improve. 

Proven financial performance for a business in a defensive industry is normally enough to rouse investors. But the looming threat of regulatory intervention meant CVS’s shares gained just 7 per cent on the day of its results announcement. Some analysts say that this level of pessimism is unwarranted and that the group may only be minimally impacted by the outcome of the CMA’s review. 

“We think CVS’ margins and returns do not reflect super normal profits or monopoly power,” said Numis. Berenberg, the company’s joint broker, was similarly bullish. “Our view is that [...] historical growth has been volume rather than price-led, and that CVS has likely not increased prices at a rate significantly ahead of wider inflation,” it said. 

With shares now trading at a forward price/earnings multiple of 16 times, we’d say the current trough represents an opportunity to gain exposure to the resilient pet health market. The CMA will provide info about its next steps early next year, which should take some pressure off the shares. For now, we remain on a buy.

Last IC view: Buy, 1,904p, 24 February 2023