US Edition CVS Group
95¾p -1¾
Questor says HOLD
Recent full-year results have provided some reassurance and the shares have bounced from 73p when Questor last gave an update on August 14.
However, although the equity looks very cheap, there is unlikely to be any significant rebound until like-for-like sales start growing.
On June 29, CVS said that turnover for the year will be in the region of £85m – about £1m below expectations at that time. This was the second time the company made a small adjustment in full-year expectations and investors were concerned about the old stock market adage that profit warnings come in threes.
Full-year revenues came in at £85.5m – an 11.6pc year-on-year rise, which is a relatively creditable performance. There was no further warning. Pre-tax profits, however, fell to £3.8m from £4.4m, although a lower tax charge meant net profits rose to £3.1m from £3m. Like-for-like sales over the year fell by 1pc, but the company's veterinary businesses were hit hard by the snow in December 2009 and January 2010. If these two months are excluded, like-for-like sales rose 0.2pc.
However, the fourth quarter saw like-for-likes falling 2.8pc – but these have improved into the new year. In the first quarter of the current year, like-for-like sales were down 1.2pc.
Net debt at the end of the year came in at £42m, which is high compared with its market capitalisation of £52m.
However, the pace of new purchases is expected to slow as the company focuses on reducing debt. Some analysts see debt being cut to about £33m by the end of the current year.
The company generated £12.6m of cash from its operations over the year, up from £12.4m last year, so a reduction of this magnitude is possible.
However, the group is keen to continue to consolidate the market, as its share is currently between 9pc and 10pc of the small animal market in the UK.
The shares were recommended because a significant amount of veterinary services are non-discretionary for pet owners. When the animal is sick they will get it treated.
However, people are still tightening their belts when it comes to discretionary spending. To counteract this, the group has developed an online dispensary and pet shop called Animed Direct. The service was launched in July, after this financial year closed, so Questor keenly awaits an update on how trading has progressed in the first quarter.
The shares appear cheap, as sentiment has been low following the profit disappointment. They are trading on a June 2011 earnings multiple of just seven times – falling to 6.6 in 2012. The company does not currently pay a dividend.
The shares were first recommended as a buy at 170p on October 6 last year and have been as high as 218p. However, they are now 44pc lower than the initial tip compared with a market up 11pc.
Questor feels reassured by the full-year results but the company needs to show that like-for-like sales are rising and progress is being made on debt reduction. Until that point, the rating remains a hold.