Berenberg lowers target price on Pets at Home

Berenberg, which reiterated its 'buy' rating on the stock, noted sales momentum at Pets At Home remained strong, with the rate of new pet sign-ups still elevated and the company's strategic initiatives delivering like-for-like growth across its retail and veterinarian businesses.

"We recently hosted the Pets management team at our UK Corporate Conference. A key takeaway was that momentum in the Retail business remains strong, with the Puppy & Kitten Club still recruiting c20k new members per week. While this is down from 'peak pet' at c30k per week in H1 2022, it is still over double the rate we would expect from a flat pet population. Given that club members typically spend c25% more per year than regular customers, with better engagement across different verticals and channels, this continued momentum supports not only our near-term forecasts but also the company's longer-term growth outlook," said Berenberg.

The German bank also noted that when looking to 2023, it expects demand to remain robust but for cost pressures to hold back margin expansion as the firm prioritises protecting its prices to drive market share gains.

"Despite a positive demand outlook, Pets' cost base is coming under pressure. Specifically, for FY 2023, management expects a c90% yoy increase in its energy bill and a c90% yoy increase in freight costs. Overall, we expect mid-single-digit cost inflation to be partially offset by relatively small price increases and cost-saving initiatives (such as rent reductions), resulting in a 4.4% decrease to our FY 2023 EBITDA estimate or a c90bp decrease to our EBITDA margin forecast," said Berenberg.

The analysts also stated that Pets trades on a 14.6x full-year 2023 price-to-earnings ratio or a roughly 6% free cash flow yield.