The annual general meeting of veterinary group CVS (CVSG) is usually an opportunity for management to proudly reveal that recent acquisitions have sent profits way ahead of expectations. Normally, what proceeds is a flurry of broker upgrades and a stampede to buy the shares. Not so this time around. News that like-for-like revenue growth has slowed to 4.3 per cent wiped 30 per cent off the group’s share price in three days. The price has been paid for high expectations.
To a certain extent, the drop in organic revenue growth can be explained by the extraordinarily strong performance last year: in the four months to September 2016, revenues grew 6.3 per cent on a like-for-like basis. But management has also pointed to a slowdown in the UK veterinary marketplace, which they think may have been caused by economic instability, and a drop in the number of clinicians. Moreover, exclude the Animed Direct online veterinary retail division – which reported a 60 per cent increase in sales – and the underlying business only grew 1.5 per cent in the first four months of the financial year, compared with 6.3 per cent in the year to June 2017.
And yet overall revenue growth remains just as spectacular as ever at 20.6 per cent. The group spent £20m on 21 new surgeries in the period, taking the total number of sites up to 444 (from 378 in the comparable period last year). Those acquisitions span the UK – from north Scotland to south Wales – and cover domestic animals, farm animals and horses. Four new sites have been added in Northern Ireland and three in the Netherlands, including the first Dutch equine business.
But the price of veterinary practices has climbed to roughly 10 times adjusted cash profits, according to brokers at Peel Hunt, compared with the historic range of six to eight times. CVS has spent £6.5m more in the first four months of the current financial year than last, for just three more surgeries. But there are positives. More expensive surgeries mean more willing sellers and CVS maintains the financial firepower to keep growing via acquisition: net debt is forecast to fall to just 1.7 times adjusted cash profits by the end of June 2018 thanks to the group’s ability to generate cash.
