Cvs Share Discussion Threads

[lomax99] 23/3/2018 14:30

Adding a few here.

[lomax99] 20/3/2018 15:37

Yes, but largely by the non-exec. The CEO sold a small amount of his options, and kept the rest, increasing his overall holding.

[wilsonst1] 20/3/2018 15:30

Directors share sales so close to fundraising. Mmmmmmmmm

[lomax99] 20/3/2018 15:26

Don't think so, market jittery and memories of the recent plunge to c. 830's. They got the recent placing away at 10.75, so not convinced this has much further to go before it bounces, but who knows! Tempted to add around here.

[hkre3] 20/3/2018 15:10

Is there any indication as to why it’s happening? There’s no pending financial updates unless my timeline is wrong. recently acquired two more practices. Doesn’t seem to be a reason for ~6% drop in a couple of weeks?

[lomax99] 20/3/2018 14:19

Well that was quick, think I will leave it a tad longer!

[lomax99] 20/3/2018 11:21

Drifting, looking to add sub £10.

[lomax99] 20/2/2018 13:40

iii Stockwatch

Stockwatch: A 'buy' signal, or screaming 'sell'

Does a drop in the AIM-listed shares of £700 million veterinary services group CVS Group (CVSG) merit buying into? Or is a softer trading statement, followed by a placing to prop up the show, more likely a 'sell' signal?

There's also a wider question about whether a plethora of "buy-to-build" groups now reflect risks similar to the late 1980s when acquisitions were in vogue. Most analysts say the 1987 stockmarket crash did not reflect the real economy; it was down to "portfolio insurance"trading. But it was also a timely reaction against 1980s excesses, which caused plenty of over-stretched companies to fall apart come the early 1990s recession.

True, accounting reforms have closed some loopholes encouraging aggressive practice, and non-executive chairmen counter a focus of power in CEOs. But there's a similarity in the way balance sheets show strain and highly-valued stocks are exposed to any slowdown in the underlying business. This time around, interest rates have been much lower and for longer, guaranteeing pain when they do rise, given corporate/personal debt levels are higher even than 2007.

Specifically, regarding CVS Group, it appears dependent on acquisitions, at least to deliver anywhere near the growth rates investors look for.

When "buy-to-build" works, and eventually doesn't

The modern aim is typically to "rationalise a fragmented industry", achieving economies of scale from buying inputs for example, hence avoiding the risks of over-stretched conglomerates. "Focused diversification" has, however, met its own strains recently, with outsourcers feeling the pressure of government spending and FTSE 250-listed Dignity (DTY) becoming complacent towards online rivals.

On the face of it, there isn't a lot of benefit to sweeping vets' practices into a listed group. Pet-owners appreciate quality of care, more likely seen to derive from a private clinic than a plc. CVS has introduced cross-selling of pet insurance, food, drugs and even funerals, though, in due respect, it operates seven referral centres across the UK - hospitals offering top-quality care - a competitive advantage.

But the biggest financial driver is exploiting a valuation gap on which it can acquire vet practices - in recent years, on about 8 times annual cash flow up to 10 times currently -helped by relatively cheap long-term debt and, more recently, share placings. While the latest one at 1,075p was a discount to recent market prices, it represents 23 times projected earnings for the year to June 2018, assuming they do double (see table).

Management cites a £40 million pipeline of acquisitions and, indeed, the music could continue a few more years given CVS's modest 14% share of the UK small animals' veterinary market.

Attractions in acquiring vet practices

Pre-1999, vets had to own their practices, but de-regulation has seen the emergence of corporate buying. There is inherent motivation to sell out for a lump sum: while vets can earn decent salaries, it's far less easy to sell/pass on the business - younger vets nowadays loaded with student/mortgage debt and vets' offspring may be seeking a fresh career.

Secondly, vet practices ought to offer relatively good quality earnings. Pet owners often want the best for their animals; supposedly a third of British people are in single households, likewise older people may appreciate the company that pets offer. Animal shelters do tend to report influxes during hard times, but checking CVS's annual reports over 2008-10 the group's organic progress was good.

Disappointment last November

The AGM was told of July to October total sales up 20.6% (after acquisitions) but like-for-like up only 4.3%, "reflecting greater general uncertainty in the UK economy and some shortage of clinicians in the UK." Like-for-like sales were only 1.5% without the contribution from Animed Direct, the UK's biggest online seller of drugs which is high-growth albeit low-margin. CVS plans to attract more clinicians by raising salaries, hence prices, which assumes overall demand proves sticky. Time will tell.

The stock thus fell 44% from its 2017 high, to 830p, as classic "ex-growth" fears deflated a forward price/earnings (PE) ratio near 32 times. The latest £60 million placing at 1,075p bolsters prospects, but CVS's financial balancing act will get trickier if Brexit and inflation/interest rates hurt consumers. Should underlying trading continue to lack vigour, the stock is exposed to drop again, a prospective yield of 0.5% offering no prop.

In fairness, the placings are relatively recent

CVS has evolved progressively: founded in 1999 and floated in 2007 at 205p, its shares rising seven-fold by last November. In due respect, high prices relate also to a modest 64.1 million shares issued, a healthy sign affirming strong cash flow profile (see table) and mitigating the need to issue shares for development, at least until the acquisitions rate has quickened. At end-2016, £30 million was raised via a placing at £10 a share.

The market has lapped up the story, a positive bias in its stock reflected by an annual average historic PE well over 50 times (see table). Fine, so long as the music continues.

Last Friday's interims reported earnings per share (EPS) down 25% to 7.8p due to intangible assets amortisation, deferred considerations and costs of acquisitions, weighing. Writing back amortisation, however, operational cash flow rose 37% to £26.5 million. A dichotomy of "normalised versus reported" earnings tends to get tolerated for so long as an acquirer's story is overall strong. If not, then this can also weigh on sentiment.

As vets realise they are in demand and practices get dearer, CVS is diversifying into equine treatment where there is lower competition to buy practices, also into the Netherlands.

Beware balance sheet issues

At end-2017, intangibles represented 203% of net assets, quite inevitable anyway for an acquirer of "people businesses". I'm more concerned by a lack of explanation in the accounts, where trade payables (money owed to suppliers etc) exceed trade receivables (money due in) by £20 million or 58%. Thus, despite cash-at-bank rising to £10.3 million, the company's debtors can't promptly be settled. Such an acid test may be harsh but begs the question also whether profits are being enhanced by delayed payments.

By way of comparison at Carillion, its end-June 2017 trade payables were 69% in excess of receivables, and suppliers complained bitterly about 120 days payment practices once the company entered liquidation. Not to suggest CVS is built on sand, rather that all companies should justify such a material imbalance, in notes to the accounts.

Of £127 million debt at end-2017, 97% was long-term, the £1.7 million interest charge clipping 21% off operating profit. There was also a £200,000 "amortisation of debt arrangement fee" within £1.9 million interim finance expenses. Deferred income tax liabilities edged up 8% to £16.6 million. Thus, a placing looks as if it was prudent anyway, to bolster finances.

Potentially more a'short' than a'long'

Call me cautious, but I think all this adds up to investors reckoning CVS shares have had their best run. If the UK economy doesn't weaken, then spending on pets and further acquisitions may prop up the show, but the market will see through this if like-for-like trading remains stalled.

Yes, the chairman bought £91,150 worth of shares last December at 911.5p, taking his holding to 110,000 shares, but in a mass of detail on the 1,075p placing, it's not clear if any directors/managers bought at all.

I would not touch CVS until at least another update, and despite no disclosed short positions, it's one to watch for further downside if Brexit and interest rates disrupt consumer spending. Avoid.

[lomax99] 19/2/2018 12:23

IC comment today:

CVS issued shares to pay down its debt

CVS's (CVSG) half-year figures were accompanied by news that the veterinary group had initiated a discounted placing of 6.4m shares at 1,050p apiece. The money raised will be used to pay down the group's growing debt pile, and fund £40m in targeted acquisitions over the next six months. The placing shares represent a maximum of 9.88 per cent of existing voting rights and will be initially dilutive for earnings.

CVS bought 30 veterinary surgeries during the half year and an additional four since the period end. The acquisition spree pushed sales up by a fifth, but strip out the impact of the new sites and you're left with a creditable organic growth rate of 5.6 per cent. Operating profit fell by 14 per cent on higher amortisation charges and acquisition-linked costs, but management highlighted a 15.5 per cent rise in cash profit.

Analysts at Peel Hunt expect pre-tax profit of £41.3m in the year to June 2018, giving EPS of 53.8p, compared with £35m and 47.4p in FY2017.

IC View

CVS has been building revenues and cash flows on the back of an ambitious acquisition strategy as it seeks to take advantage of a still fragmented marketplace. But the group's rate of expansion increases execution risk, and the high level of intangible assets won't sit well with some investors. Some may even question why management plumped for a dilutive capital-raise over senior debt. However, the investment rationale has not changed, with the animal healthcare market expected to grow at around 5 per cent a year for the next decade, aided by an increased take-up of pet insurance. The shares, trading on 21 times forward earnings, still present a decent value buying opportunity.

Last IC View: Buy, 915p, 5 Dec 2017

[r ball] 16/2/2018 18:11

Inexplicable 5% rise yesterday

[aimingupward2] 16/2/2018 14:12

The placing was "heavily oversubscribed" at 1070p - so it seems there's no doubt that there was a major over-reaction resulting in the price fall this morning. The uptrend in the share price is in tact.

[lomax99] 16/2/2018 08:25

Solid numbers. Placing discount was higher than I would have liked, although prefer equity to further debt. Market reaction overdone, have added.

[stun12] 18/1/2018 09:07

Very pleasant. Thanks, guys, profit taken. Best of British to longer term holders.

[lomax99] 17/1/2018 20:55

Not really, this is in a similar format to the November 2016 comment.

They have not historically given Revenue/Profit numbers until the formal half year trading statement, which last year was not until 31 March. To release an update so soon after the end of the half year to 31 December, I would not have expected these numbers.

IMO this guidance is positive, given the market reaction to the November 2017 update I suspect they were keen to provide an update sooner rather than later. The timing is unusual, perhaps they thought that the market would have more time to to digest the update if they released it when they did.

[typo56] 17/1/2018 20:30

Very odd time of day to release a trading update, epsecially for a 'positive' one.

No mention of revenue or EBITA or market expectations, as they've had in previous trading statements.

I wonder what brokers will make of it.

[lomax99] 17/1/2018 20:09

Positive trading update, released after market close.

[lomax99] 13/1/2018 19:00

Peel Hunt re-iterates a 1350p target.

Not carrying much weight, but MF fancies CVSG for a recovery:

[stun12] 11/1/2018 18:38

Thanks, seems about right. Looks like it's settling down a bit with a lovely neat £10 closing price. Hopefully a steady move back up. You're right, institutions keep adding, albeit in smallish amounts.

[lomax99] 10/1/2018 19:52

Hi Stun, No the article was around the time of the posting, and the Directors holding was announced on 8 December. Institutions have been increasing recently, it looks oversold.

[stun12] 10/1/2018 16:50

Hi lomax. Is that article quite old? Just that it's add recommendation is at 915p, a level last reached ahortly after the figures came out. Also, can't see the Chairman's purchase...similarly dated?

Bought some at just over and just under £10 as it seems to motor once it gets going, mostly on the downside at the moment. Just looking for a quick 10% or so.

[lomax99] 08/12/2017 07:55

Good to see the Chairman pick up £91.1k worth of shares.

Latest IC comment:

CVS pays the price for high expectations

The annual general meeting of veterinary group CVS (CVSG) is usually an opportunity for management to proudly reveal that recent acquisitions have sent profits way ahead of expectations. Normally, what proceeds is a flurry of broker upgrades and a stampede to buy the shares. Not so this time around. News that like-for-like revenue growth has slowed to 4.3 per cent wiped 30 per cent off the group’s share price in three days. The price has been paid for high expectations.

To a certain extent, the drop in organic revenue growth can be explained by the extraordinarily strong performance last year: in the four months to September 2016, revenues grew 6.3 per cent on a like-for-like basis. But management has also pointed to a slowdown in the UK veterinary marketplace, which they think may have been caused by economic instability, and a drop in the number of clinicians. Moreover, exclude the Animed Direct online veterinary retail division – which reported a 60 per cent increase in sales – and the underlying business only grew 1.5 per cent in the first four months of the financial year, compared with 6.3 per cent in the year to June 2017.

And yet overall revenue growth remains just as spectacular as ever at 20.6 per cent. The group spent £20m on 21 new surgeries in the period, taking the total number of sites up to 444 (from 378 in the comparable period last year). Those acquisitions span the UK – from north Scotland to south Wales – and cover domestic animals, farm animals and horses. Four new sites have been added in Northern Ireland and three in the Netherlands, including the first Dutch equine business.

But the price of veterinary practices has climbed to roughly 10 times adjusted cash profits, according to brokers at Peel Hunt, compared with the historic range of six to eight times. CVS has spent £6.5m more in the first four months of the current financial year than last, for just three more surgeries. But there are positives. More expensive surgeries mean more willing sellers and CVS maintains the financial firepower to keep growing via acquisition: net debt is forecast to fall to just 1.7 times adjusted cash profits by the end of June 2018 thanks to the group’s ability to generate cash.

IC View

The recent turn of events will have been disappointing for followers of our buy tip. However, we also think the sell-off is a major over-reaction to moderately disappointing news. With the shares now trading on 17 times forward earnings, we think this is an ideal opportunity for investors to top up their holdings. Buy at 915p.

[lomax99] 07/12/2017 12:19

Interest from MARS would not be that left field: