The vet industry is consolidating and CVS is the fifth-biggest vet company in the UK
Questor says HOLD
The veterinary industry is undergoing a period of huge consolidation. As the old guard age and retire, they’re increasingly selling out to big conglomerates like CVS Group, Britain’s largest vet firm, which has the firepower to buy and run practices in what remains a fragmented industry in which margins can be wafer thin and scale is key.
CVS runs 360 surgeries across the UK and business is going well. Despite its size, the company has just 7pc of the total vet market in Britain and competition is limited, so there is considerable scope for further growth through acquisition.
Last year, CVS entered a new geography when it bought its first practice in Northern Ireland. The company has the financial firepower on its balance sheet to continue to scoop up market share so that it can continue to enjoy the benefits afforded by economies of scale.
In the last financial year, like-for-like sales from the veterinary clinics grew 6pc. Total sales were up by a third after CVS acquired 67 surgeries. The company’s Healthy Pet Club is going great guns, too. Membership ballooned 18pc to 253,000 last year. This scheme offers customers a range of discounts and benefits and, most importantly, keeps them loyal.
Although 90pc of CVS’s revenues are generated from its veterinary business, it has moved into other areas. It runs diagnostic laboratories, pet crematoria, an online dispensary and a recruitment firm. The crematoria business has doubled sales in the past year to £5m. CVS can guide business from its clinics into these operations, rather than to third parties, keeping all the profits in-house.
Referrals and risks
Vet clinics make their money by doing expensive surgery. A key priority for CVS is developing its referrals business so that its clinics can refer lucrative, complicated cases in-house. It’s making great progress on this front and now operates six centres.
Over the past 12 months, it acquired two specialist centres, one in Bristol and one in Castle Donington, and revenues are growing steadily from both CVS and third-party operated clinics. Expect more referral centre acquisitions this year.
There are risks: if the economy weakens, discretionary spending on pets will shrink. CVS is also highly leveraged, with net debt at 2.8 times cash profits. That said, the vet business is very cash generative, with low capital spending requirements. Analysts at Peel Hunt forecast free cashflow of £25m in 2017, which could help cut the debt ratio to under two times.
CVS’s stellar growth profile doesn’t come cheap. The shares have rallied 15pc in the year-to-date and trade on a forward PE ratio of 23, with hardly any yield on offer. That makes CVS a core holding, but one that’s too expensive for Questor at the moment.