Why it is time to sink your teeth into the resilient pet care leader
Thursday 05 Sep 2019 Author: James Crux

A rally at retailer Pets at Home (PETS) could have further to run as the pet care specialist rebuilds confidence in its growth story.

The UK’s leading pet care business, selling products online and via 452 physical stores, Pets at Home also operates a UK leading small animal veterinary business with practices based in stores and at standalone locations.

The £1.16bn cap is the dominant UK pet retailer with roughly 23% market share. It offers a wide range of products, a significant own-brand offering and pet-related services (vets and grooming), all supported by national marketing.

Pet retailing is a resilient niche engendering high levels of repeat business, since pet owners spend regularly on consumables and impulse-led accessories.

In recent years, Pets at Home’s retail and vet divisions have come under pressure from rising online and discounter competition. However, CEO Peter Pritchard has stabilised the business and is introducing more customers to Pets’ complete pet care offer and capturing a greater share of their overall spend.

In 2019, the shares have scurried higher to reward early signs of turnaround progress. The momentum with which Pets exited the previous financial year continued into the first quarter of the new one, with robust like-for-like growth in both the retail and vet group divisions encouraging management to guide annual profit expectations slightly higher.

In the core retail business, market share gains look sustainable with investment in products and price cuts combating competition, as demonstrated by slowing growth at major online rival Zooplus.

The vet business is an established player in a sector that is growing and consolidating, although it has suffered from over-expansion and cost pressures. Nevertheless, broker Numis expects a return to ‘healthy double-digit profit growth’ beyond this financial year, as well as materially improved cash conversion as the need to provide loans to joint venture practices abates.

The broker forecasts pre-tax profit of £88m for the year to March 2020, building to £98m in 2021 and £107m in 2022. Pets at Home’s free cash flow is predicted to accelerate from around £56m this financial year to over £70m next year and £80m in the year after.

Based on forecast earnings of 13.9p and a 7.5p dividend this financial year, the recent strong rally hasn’t left Pets at Home looking too expensive on a multiple of 16.6-times with a decent 3.2% dividend yield.

Numis argues the current valuation fails to reflect Pets’ growth opportunity and it implies that earnings forecasts could see significant upgrades if the company keeps doing well.

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