RBC Capital downgrades CVS Group on CMA review

RBC Capital Markets downgraded CVS Group on Friday to ‘sector perform’ from ‘outperform’ and slashed the price target to 1,200p from 2,100p after the UK Competition and Markets Authority said it had provisionally decided to launch a formal investigation into the vet market.

RBC said the decision "casts a pall over the industry that is unlikely to be resolved for 18-21 months".

"Based on our new scenario analysis, published today in our industry report, CVS' shares are significantly over-discounting the risk, based on our scenario analysis, but we doubt this valuation discrepancy will attract new investors until closer to a more final CMA outcome," the bank said.

RBC said the price target was cut only on the basis of lack of news flow. It said investors may struggle to get excited about the stock until closer to the end of the investigation or, indeed, after full resolution.

"We think investors with an 18-24 month investment horizon should see the current price as a great opportunity to buy shares with almost 3x upside potential which on a worst-case basis is the upside when applying 13x to Jun-26 EBITDA," it said.

"Investors focused on nearer-term performance are likely to take a view that shares will go sideways for now.

"Our new £12/share price target is based on a rather arbitrary 50% discount to current 'fair value' to account for the perception around CMA risk."