Sales growth slowdown triggers CVS share slump

Staffing issues and consumer uncertainty blamed for weak trading update
Thursday 07 Dec 2017 Author: James Crux

One of AIM’s most successful stocks has experienced a rare moment of share price weakness. Veterinary services provider CVS (CVSG:AIM) has fallen by 30% in value to 900p in the past week after a slowdown in sales growth, blamed on uncertain economic conditions troubling consumers and a shortage of clinicians in the UK.

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It says salaries will now be increased by more than inflation, plus more flexible working hours, in order to attract more veterinary surgeons to work for the company. It will fund these extra costs by putting up its prices.

CVS achieved 4.3% like-for-like sales growth for the four months to 31 October, a slowdown from the levels seen in financial years 2016 and 2017.

Stripping out high growth but lower margin online drugs arm Animed Direct, CVS’s like-for-like growth was a muted 1.5%.

This news has soured CVS’s long run of making money for its shareholders. It had generated 680% total return (share price appreciation plus dividends) in the five years to the eve of its troublesome trading update on 30 November.

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The business has historically generated strong cash flows and rising dividends thanks to operating in an industry more resilient than most, since UK animal lovers prioritise spending on the wellbeing of their pets.

While the near-term outlook is less certain, Berenberg reiterates its ‘buy’ rating and £14.50 price target, implying 60% upside over the next 12 months.

The investment bank flags easier year-on-year comparative figures across the rest of the financial year to June 2018, meaning ‘like-for-like growth should accelerate in the second half’. It still forecasts robust 4.8% like-for-like growth this year.

CVS itself says customer loyalty remains high with its healthy pet scheme memberships exhibiting ‘excellent growth’ and providing earnings with some backbone.

Berenberg notes CVS is making strong progress on acquisitions in the UK and Netherlands with its pipeline of deals remaining strong.

It adds: ‘CVS has made further acquisitions in the equine market, where it envisages significant medium-term opportunities given the lack of consolidation and less competition for assets from its main competitors for acquisitions like Independent Vetcare.’

Among the risks to its bullish investment thesis is competition for practices; any increased competition for assets would raise the multiples CVS has to pay on M&A, ‘decreasing the earnings accretion it currently enjoys on acquisitions’.

For the year to June 2018, Berenberg forecasts £315m revenue (2017: £272m) and £38m pre-tax profit, ahead of £335m and £42m respectively in 2019.

On forecast earnings of 46.6p, rising to 51.2p in 2019, CVS’s sharp de-rating leaves the shares selling for less than 20 times forward earnings. (JC)

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