Vet group CVS's cash generation makes it top dog

There is no question that British people really love their pets. Recession or not, if a pampered pooch or beloved cat falls ill, it will definitely be taken to the vet.

CVS Group

170p +3

Questor says BUY

This fact has helped veterinary surgery business CVS Group weather the downturn very well – and its future growth profile, underpinned by a good business model, looks very promising.

CVS operates 61 small animal veterinary practices across the country. It employs 368 vets, as well as operating six diagnostic laboratories and one crematorium and pet cemetery in Rossendale, Lancashire.

Its recent full-year results were excellent. They underscored the resilience of the group's business in a recession, the cash-generative nature of the operation and the value the company can add.

All three units – veterinary practice, diagnostics and crematorium – remain profitable. As of June 30, the end of the last financial year, the group had £2.8m in cash in the bank. In the two months between the end of the year of the year and the results announcement, cash balances had swollen to £4.8m, even after the group shelled out £300,000 to purchase a new surgery in Newbury.

In the year to June 30, pre-tax profits jumped from £124,000 to £4.4m, but a number of writedowns were made last year, which hit the pre-tax figure. On the operating level, profits jumped 72pc to £7m on revenues that were 23pc ahead at £76.6m.

On a like-for-like basis, revenues increased 2pc, below the more normal 4pc-5pc in better economic times, but this should move back to the high level as economic prospects improve.

Talking to Paul Coxon, CVS's finance director, about the group's business model Questor was struck by the similarity to that of another company which is highly rated by this column: Dignity. It therefore came as no surprise that Richard Connell is chairman of CVS. Mr Connell was previously chairman of Dignity.

The company's main business is in the consolidation of the veterinary surgery sector, which remains highly fragmented. Even as the country's market leader, the company only has a 7pc – 8pc penetration into this market. Typically, the group buys practices from vets in their 50s who wish to crystalise the capital in their business, but still want to carry on working.

One way in which the company increases the profitability of individual surgeries is from the centralisation of administration functions. Taking this burden away from vets allows them to carry on providing front-line services to animals, while giving up the dreary side of their business. Also, CVS can get better deals on the purchase of veterinary supplies because it buys in bulk.

The shares have jumped following the results and are now trading on a June 2010 earnings multiple of 11 times, falling to 9.5 next year. This does not look expensive taking a sensible time frame. Questor does not expect the shares to leap ahead in short shrift, but slow and steady growth is likely.

Because of the group's stage of development, it is not yet paying a dividend, so it is not suitable for income seekers. But for those with an eye to future growth, shares in CVS Group are a buy because of its sound strategy and impressive cash generation.