Pets at Home has fended off Amazon, the goliath for all bricks and mortar retailers. Its next fight? Convincing the market that the surge in sales recorded during the pandemic isn’t heading for a sharp reversal.
The boom in pet ownership under lockdown spurred shares in the FTSE 250 constituent up more than 50 per cent over the past two years, which including dividends, translates into a total return of almost 60 per cent against the paltry 1 per cent delivered by the index. But since September, the shares have lost 15 per cent in value as investors have become wary of “pandemic winners”.
Yet another profit upgrade should reassure investors that catalysts for the shares to re-rate remain. So too, should a valuation that now looks less demanding. At 17 times forward earnings, the shares are valued below their pre-pandemic peak multiple
of 21.
Underlying pre-tax profits for the 12 months to March this year are now expected to come in at least at £140 million, above the £135 million forecast by analysts. Annual revenue growth has inevitably slowed as the retailer lapped strong lockdown trading, with revenue up 8.7 per cent during the final three months of last year versus the 30 per cent recorded over the three months to June.
But impressive like-for-like growth rates against the pre-pandemic level have remained more consistent as the financial year has progressed, at just over 28 per cent during the most recent quarter. Pet ownership has grown, which has naturally increased the addressable market for food, toys and veterinary bills.
The seeds of Pets at Home’s future earnings growth lies in how the business has been set up to take a higher share of that expanding market. In 2017, management took the decision to invest £28 million in cutting — predominantly food — prices to a level that was more competitive with online rivals.
The retailer has also sought to leverage its physical presence to outclass Amazon. First, there’s its 450 in-store and standalone Vets4Pets branded veterinary practices. It receives roughly 16 per cent of sales in exchange for providing business support services. About 90 per cent of those practices are now profitable, but between 30 and 40 per cent are less than five years old. Given it takes roughly ten years for one of those businesses to reach “optimum level”, according to chief executive Peter Pritchard, that leaves scope for growth in veterinary revenue to translate into an even bigger boost.
Subscription services such as healthcare and easy-repeat food delivery plans, which now account for just under a fifth of the group’s revenue, are another reliable way of gaining more of pet owners’ pounds. So, too, are VIP clubs, which offer discounts in return for loyalty. About a third of revenue comes from pet services, which management hopes to increase to half of the group total.
The higher margins attached to services should come in handy in combating wage inflation and rising retail product costs. Growth in services revenue helped ease the negative impact on the retail gross margin during the first half of the year, but it was the operational gearing benefits of the vets business that meant the overall group margin actually increased during the period.
Analysts at Liberum forecast a rise in the gross margin to 50 per cent this year, which it reckons will hold steady during the next. Sourcing roughly 80 per cent of products from within the UK helps in managing longer delivery times, too.
The departure of Pritchard later this year could be cause for nervousness. A successor is yet to be announced. But there is enough reason to have confidence that the shares will regain their stride.
ADVICE Buy
WHY At an undemanding valuation, the business is well set up to take more share of a growing market
Brewin Dolphin
Market volatility means that shares in wealth managers might struggle to find much momentum in the near term. The FTSE 250 player Brewin Dolphin can’t do much about that, but it hasn’t helped itself with an update to its technology systems that has over-run in terms of time and cost.
News that the £70 million upgrade is on track to complete by the summer should reassure investors but they should take greater heed of an improving organic growth rate. Net inflows of £600 million during the final quarter of last year puts Brewin on track to repeat the 4.4 per cent rate of organic growth in assets it notched up last year, so says the brokerage Shore Capital.
Brewin is targeting annual organic growth in assets of 5 per cent, an adjusted pre-tax profit margin of 25 per cent and double-digit earnings per share growth, all by 2025. Progress on the former should flow through to the latter two metrics.
How does Robin Beer, the chief executive, hope to entice more cash into the business? Part of the plan is capturing business from each age demographic, ranging from a digital, execution-only platform for younger investors, to discretionary investment management services for those with greater wealth and more complex financial planning needs.
Flows into discretionary management, where a client hands over the running of their portfolio entirely, have been the fastest growing, at an annualised growth rate of 5.6 per cent during the fourth quarter. Getting a head start in building links with independent financial advisers has helped give Brewin the edge over rival Rathbones, says Paul McGinnis, an analyst at Shore Capital.
A forward price-to-earnings ratio of 13 looks inexpensive against pre-pandemic levels and in a wealth management industry that is rapidly consolidating, could make Brewin appealing to a bidder. A dividend of 16.82p a share forecast by analysts this year would also attach a higher prospective dividend yield (5.1 per cent) to Brewin’s shares than its rival.
Investors might be circumspect when it comes to buying into wealth managers at present, but Brewin is worth holding for the promise of that income, at least.
ADVICE Hold
WHY Good dividend yield at the current share price
