Berenberg reiterates 'Buy' on CVS Group, hails margin expansion

Analysts at Berenberg hailed CVS Group's shift in its business mix, with the resulting margin expansion that resulted, reiterating their 'Buy' recommendation on the stock in the process.

However, like-for-like sales were likely to slow towards the sector average in second half of the year, the broker cautioned.

Even so, the broker raised its earnings per share forecasts for 2017 to 2019 by 4.0% for each year, as a result of which it bumped up its target from 1,200p to 1,220p.

Although investors often focus on the rate of growth in like-for-like sales and M&A when analysing the veterinary group, the most noteworthy aspect of the firm's interims was its improved operating margin at the operating level, it said.

In terms of earnings before interest, taxes, depreciation and amortisation, margins rose to 16.1% from 14.5% in the previous six-month stretch, even as CVS invested significantly on people and equipment.

The key to the fatter margins was nevertheless the "strong improvement" in profitability in the vet practice side of the business, as CVS shifted towards higher-margin services versus drugs even as it moved to use more of its own brand drugs, with the latter having their own benefits.

"We have increased our forecast margins for the business as we believe the business will continue to benefit as the volume of own brand drugs sold in the business continues to grow," Berenberg said.

Analyst Sam England also pointed out that the company's M&A continued to be highly accretive even though in the latest six months it had paid an average price of 7.5 times historical EBITDA, instead of the seven times operating profits seen in fiscal year 2016.

That contributed to England's decision to lift his estimates.

CVS still had between £30.0m to £40.0m of firepower for M&A left, assuming it leveraged up the business to 2.5 times profits, he said.

On a slightly more cautious note, England tipped his hat to the company's "exceptionally strong" 7.2% increase in LFL in the first half of 2017 but added that a level of growth closer to the UK veterinary market's average rate of between 3% to 4% was more likely in the second half.