Citigroup initiates Pets at Home at 'buy'

Citigroup initiated coverage of Pets at Home at ‘buy’ with a 275p price target, given its expectation of the medium-term margin upside opportunity and cash returns.

The bank reckons that over the next 10 years, the vet business could generate an incremental £40m earnings before interest, tax, depreciation and amortisation on a full-year 2016 group EBITDA base of £125m and account for more than 35% of group EBITDA. It also reckons 225m of cash could be returned in dividends over the next three years.

Citi said its investment thesis was structured on five main factors, the first being that merchandise will continue to drive the top line through store growth and LFL, although headwinds will limit EBITDA growth.

It said services were the key driver of EBITDA growth through expansion and maturity.

Citi said that while online competition was a concern, it was unlikely to be as disruptive as expected. It also said that against an uncertain UK demand outlook, Pet Care looks more resilient.

Finally, it said the company will soon start to return excess cash to shareholders. "We expect surplus cash to be returned to shareholders via a special dividend, driving our expectation of a FY17 5% dividend yield (including a special
dividend)."

At 0953 BST, the shares were up 0.7% to 247.30p.