Veterinary services specialist CVS Group (CVSG:AIM) is under a cloud at the moment following confirmation by the competition watchdog CMA (Competition and Markets Authority) it would investigate the pet care market for unfair practices after its initial look into the market in September 2023.
The CMA is concerned pet owners are overpaying for medicines and local markets are too concentrated, allowing large companies to act in ways which reduce competition.
CVS shares went up on the day of the news (23 May), confirming our view that most if not all the bad news is now priced into the valuation of the business.
The shares trade around 60% below their September 2021 peak and the PE (price to earnings) ratio has dropped by 70% to 10.6 times from around 35 times two years ago.
The risk-reward proposition looks attractive, presenting long term investors with a great opportunity to buy a quality growth business trading on an undeserved single-digit PE multiple.
CVS is 18 months into a five-year plan aimed at doubling EBITDA (earnings before interest, tax, depreciation and amortisation) through a combination of higher organic growth and improved margins.
The objective is to drive organic sales growth by between 4% and 8% per year while adjusted EBITDA margins are expected to see a step up to between 19% and 23% compared with a five-year average of around 17%.
Acquisitions are a key driver of the company’s growth strategy, with a focus on Australia and the UK after the disposal earlier this month of its non-core Irish and Dutch operations.
CVS entered Australia in July 2023 and management sees an opportunity to repeat the success they have achieved in the UK by consolidating the market through targeted acquisitions.
At the first-half results in February, management confirmed a strong pipeline of acquisitions in Australia with another 10 deals lined up for the second half of the financial year. Four acquisitions were made in the UK in the first half following submission papers to the CMA.
The company highlights Australia’s low level of corporate consolidation, favourable market dynamics and strong similarities with the UK as key attractions.
CVS has built a strong track record of growth with operating profit growing eightfold since 2014, equivalent to a CAGR (compound annual growth rate) of over 26% a year.
The business is conservatively financed with net debt to EBITDA of 1.1 times at the end of the first half and it earns an attractive 18% return on equity.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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