Rampant inflation has forced households to cut back their spending and investors to contemplate turning to companies that sell essentials. CVS Group, the veterinary services company, falls into that category. People love their pets, treat them as part of the family, keep welcoming more of them into their homes and will pay whatever is required to make sure they’re OK. You can’t get much more defensive than that.
CVS is opening up its chequebook to capitalise on our love of animals. As part of a five-year plan to deliver annual organic revenue growth of 4 per cent to 8 per cent and an adjusted margin of 19 per cent to 23 per cent, it aims to invest annually anywhere between £30 million and £50 million on improving its facilities and at least £50 million on acquisitions. To fund that, CVS more than doubled its debt facility to £350 million at competitive borrowing rates.
Acquisitions have always been a core part of the group’s strategy. CVS has grown substantially by sweeping up small, locally owned vets’ practices. The four countries in which it operates are dominated by these little businesses. Buying them expands its reach and increases profits, including through stronger buying power and cross-selling: the group also offers laboratory diagnostics, pet crematorium services and an online pharmacy. CVS now owns about 500 veterinary practices. Most are in the UK, with the rest in the Netherlands, the Republic of Ireland and Australia.
Investment is not centred on one specific region. The company reckons there are plenty of consolidation opportunities in Britain that the Competition and Markets Authority will be happy with. The group has not set up shop everywhere in its home market, synergy opportunities are plentiful and its main competitors are backed by highly leveraged private equity firms.
Overseas, there is even greater scope to grow and often bigger bargains. That was part of the rationale for the recent move into Australia, which has loads of independent vets who can be bought at lower multiples because there are not as many competitors. The potential is huge.
Fortunately, CVS is no longer reliant on bolt-ons to pump up sales. These days, organic growth is plentiful. A couple of years ago, the shares were hit hard after a strategy based on buying as many vet practices as possible backfired. Lessons have been learnt and, under new management, the focus has changed. Now more care is put into ensuring that facilities already owned are top-notch and are running to their full potential. Other priorities include not overstretching the balance sheet or getting caught out by another staff shortage.
CVS needs highly skilled professionals and sadly there are not always enough of them, which inevitably leads to inflated wages. Under the previous regime, a lack of attention to these dangers caused costs to rise much faster than sales. The new bosses are trying to avoid a repeat by teaming up with vet schools and making employees feel valued. More generous pay and benefits will squeeze margins, but at least it reduces the risk of running out of animal doctors again.
CVS is in a better position than before. Some of the biggest concerns spooking investors have eased, investments offer a lot of growth potential and all those puppies and kittens welcomed into homes during the pandemic are going to require more care as they age. Normally, you would expect that to translate into a higher price tag. It hasn’t. The shares trade at an enterprise value of just over 13 times forecast earnings before tax and other charges, which is cheap by historic standards.
ADVICE Buy
WHY The resilient pet market is growing and CVS is poised to keep taking advantage
Headlam
Interest rates and inflation will not rise for ever. Eventually, they will fall and the companies that were battered by them will recover, assuming that they are still standing. Headlam is one.
Britain’s leading flooring distributor has had a tough few years. The Covid-19 lockdown killed demand; then, as things were starting to look up, the cost of living crisis hit.
When people struggle to make ends meet, they generally don’t rush out to redo their flooring. The public’s shunning of big-ticket, non-essential items recently led Headlam, a volume-dependent business with lots of fixed costs, to issue a profit warning and more investors to abandon ship. This latest setback has got some investors wondering if it will ever recover and others contemplating whether today’s price might represent a decent buying opportunity.
There are things to like about the company. People need floors and Headlam is the leader in the sector by a significant margin. Scale advantage results in lower costs and usually better-stocked warehouses than its competitors.
Headlam also has a strong balance sheet, underpinned by freehold properties and stock, a track record of good cash generation and generous dividend payments and a fairly inexpensive strategy to win more business with big retail clients and small contractors. Historically, the company focused on serving the public via independent retailers. Now it’s trying to broaden its customer base and geographic reach. Results so far have been positive.
All of the above should boost Headlam’s survival prospects and give it wings when demand returns. The problem is we do not know when that will happen. Weak residential sales, which account for about two thirds of revenue, will not go away overnight and more bad news, including a trimmed dividend, could be in store beforehand, starting when the company reports its interim results on September 5.
Most signs point towards Headlam having what it takes to survive and bouncing back fast, while the share price tells a much uglier story. This is one for contrarian investors. Everyone else may want to steer clear for now.
ADVICE Buy
WHY Battered shares have recovery potential
