To ask a dog owner if vets’ bills are good value is to trigger either hysterical laughter or a long story about a labradoodle who once ate a stick and it cost £7,000.
This is why shares in CVS Group — which owns about 500 veterinary surgeries in the UK, the Netherlands and Ireland — crashed 36 per cent last month when the Competition & Markets Authority (CMA) announced a review of vets’ fees “amid concerns that pet owners may not be getting a good deal”.
The market has bet that CVS, as well as rival chains such as Pets at Home, will face regulatory action. And so Aim-listed CVS, whose shares were changing hands for more than £25 apiece in September 2021, is now priced at about £16. This left the firm’s chief executive, Richard Fairman, in a strange position last month: presiding over CVS’s full-year results, he had to play down profits that he would ordinarily have shown off.
Indeed, the numbers were good — for investors, if not pet owners. CVS’s revenues, which stem from labs for diagnostic services, pet crematoriums and an online pet pharmacy business, as well as vet practices) rose 10 per cent to £608 million for the year to July, while pre-tax profit was up by 50 per cent to £54 million.
Fairman was keen to stress that most of the leap in profits was due to a one-off charge arising a year earlier from its £9 million purchase — and then sale, after regulatory intervention — of vet business Quality Pet Care.
He dismissed fears over potential intervention by the CMA, claiming it was a shortage of vets, pushing up wages, that had sent bills soaring, as well as inflation.
Analysts agree, seeing the sell-off in the wake of the CMA’s announcement as overdone. Seb Jantet at Liberum said: “There is a good chance the CMA will conclude that there isn’t a case to answer … Even if it does decide to take a deeper dive, we think that CVS will most likely fare better than some of its peers.”
Numis pointed out that CVS’s margins and returns “do not reflect super-normal profits or monopoly power”.
CVS is a defensive stock in uncertain economic times — pets are a priority even when household budgets are strained — and the company has been rubbing its hands at the prospect of pets bought in lockdowns requiring “more frequent and complex veterinary interventions” in the next five to ten years.
The shares are trading at a forward price/earnings multiple of under 16 for 2023 — lower than historic averages and also throwing open the prospect of an opportunistic private equity bid.
Buy CVS.
