CVS Group PLC

CVS Group PLC (CVSG) is one of the largest integrated veterinary service providers in the UK, which operates four laboratories performing diagnostics services for the industry and seven pet crematoria, as well as seven referral practices providing specialist treatment. The group operates in the UK, Netherlands and Republic of Ireland and owns over 500 veterinary surgeries with over 1,500 vets. The group also sells pet food, medicines and other animal related products through Animed Direct, an online store operated by the company. The operations are differentiated in four core operating segments, namely Animed Direct, Crematoria, Laboratories, and Veterinary practices.

Trading Update (FY 2019, in £m)
During the financial year ended 30 June 2019, the company’s reported total revenue rose by 24.2%, or £79.2m, to £406.5m, against £327.3m reported in FY 2018, while it achieved a revenue growth of 5.2 per cent on a like-for-like basis. Reflecting the reduction in farm gross margin following the acquisition of Slate Hall and an increase in the proportion of revenues from the farm division, total gross margin for the financial year reduced to 76.2% (from 79.6% in FY 2018).

Financial Highlights (H1 FY 2019, in £m)
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(Source: Company Filings)

As like-for-like sales grew by 4.0% during the first half of FY 2019, revenue increased by 23.7% over the prior year to £195.1m (FY 2018: £157.8m). Operating profit reduced to £3.4m (H1 FY 2018: £8.1m) and adjusted EBITDA was £23.8m, reflecting a decrease of 0.8% (H1 FY 2018: £24.0m). Profit before income tax reduced by 74.2% to £1.6m from £6.2m in H1 FY 2018 while adjusted profit before tax reduced to £17.4m (H1 FY 2018: £18.3m). Basic earnings per share declined to 1.2p in the period (H1 FY 2018: 7.8p) and adjusted earnings per share reduced to 19.7p (H1 FY 2018: 22.9p). Net debt rose to £116.8m (30^th June 2018: £69.0m) and cash generated from operations was £19.6m (FY 2018: £26.5m).

Valuation Methodology
Method:  EV/SalesApproach (NTM)


Share Price Commentary
 
Daily Chart as at July-26-19, before the market closed (Source: Thomson Reuters)
 
On 26 July 2019, at the time of writing (before the market closed, GMT 12:20 pm), CVSG shares were trading at GBX 909.60, up by 2.95 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,191.00/GBX 362.26. The company's stock beta was 0.55, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £625.42 million, with a dividend yield of 0.57%.

Conclusion
The group made encouraging progress in the second half of the financial year due to numerous actions that were taken by management to improve performance. Consequently, the company expects to deliver revenue for the full year in line with current consensus market expectations and expects adjusted EBITDA to perform above the current consensus market expectations. Moreover, as the group remains focused on operational efficiency, the targeted cost savings of £1.2m in the second half of the financial year were achieved and it expects to report leverage at the end of the year of 2.08x, against 2.40x at 31 December 2018. The veterinary sector has proven resilient in past economic downturns, and greater access to specialist procedures, increased willingness of owners to spend more on pets and favourable market with medical advancements are driving an increase in average spend on pets.

Based on the healthy prospects and supported by valuation done using the above method, we have given a "SPECULATIVE BUY" recommendation at the closing price of GBX 883.50 (as on 25 July 2019) based on 1.91x NTM EV/Sales(approx.) on FY19E Sales(approx.).
 

Mothercare PLC

Mothercare PLC (MTC) is a global specialist retailer for parents and young children with operations in over 50 countries across Europe, Asia, the Middle East and Latin America. The company offers an extensive range of Clothing & footwear, Home & travel and Toys, which are sold via a smaller wholesale operation and its own multi-channel (in-store and online) retail operations. Internationally, while the company has a small but gradually growing online presence, products are mainly sold through its Franchise Partners operated retail stores. The operations of the company are differentiated in two geographical segments, namely International and UK.

In the latest trading statement, the company warned on profits because of falling UK, international and online sales amid lower expectations for trading in the UK market because of uncertainty and volatility.

Recent Development
The company on 12 March 2019 announced the sale of the Early Learning Centre Limited to The Entertainer group of companies for a total expected cash consideration and earn out fees of up to £13.5 million, which would be used to reduce the bank debt of the company by approximately £17.5 million over the next year.

Trading Update (Q1 FY 2020, in £m)
In the 15-week period to 13 July 2019, international retail sales declined by 4.5% in constant currency basis, and online sales in the UK fell by 12.1% as a result of the store closure programme and the loss of iPad sales in those stores. While the company reported growth in the key markets of India, Indonesia and Russia, total UK sales were 23.2% lower than last year as the company closed down its stores, which were down from 134 stores and 1.3m square feet of space last year to 79 stores with 0.9m square feet of space. The company said that underlying full-year profitability before tax is anticipated to be in line with the prior year and gross margin improvements in the UK are forecasted to take longer to materialise than previously anticipated.

Financial Highlights (FY 2019, in £m)

(Source: Company Filings)

The total group revenue declined by 11.5% to £513.8m from £580.6m, reflecting the store closures and the restructuring programme undertaken by the government. The company recorded a pre-tax loss of £66.6 million (2018: £94.0 million loss) and adjusted loss before taxation declined by 36.6% to £18.4 million (2018: £29.0 million loss). Due to the short-term sales impact from the transition to a new partner in India and underperformance in the Middle East, International retail sales in constant currency were down 0.3%, and international retail sales decreased by £16.6 million to £177.2m on a constant currency basis. In the UK, due to declining footfall and online sessions driven by macroeconomic factors, retail stores sales were down by 15.8%, and online sales were down by 8.0%, while like-for-like sales declined by 8.9% year-on-year and total UK sales declined 11.8%.

Share Price Commentary

Daily Chart as at July-26-19, before the market closed (Source: Thomson Reuters)
 
On 26 July 2019, at the time of writing (before the market closed, GMT 10:40 am), MTC shares were trading at GBX 18.00, down by 8.86 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 29.25/GBX 14.40. The company's stock beta was 1.21, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation was around GBP 67.64 million.

Conclusion
The company made progress in the creation of the optimal structure for retail operations in the UK as an independent Mothercare UK franchise and reported continued support from banks, who had deferred a requirement for the group to cut its debts. The company reported a lower than expected transfer of sales after the CVA store closure programme and UK retail market remained challenging with a lower than-expected performance in the international market, mainly due to macro and micro challenges in the key markets across the Middle East.

Keeping in mind the uncertainty faced by company specific and macro factors, investors are recommended to“WATCH” the stock at the closing price of GBX 19.75 as on July-25-19, while we look for any upcoming catalysts.

*The speculative buy recommendation is valid for the current price as covered in the report (as on July-26-19)
*All forecasted figures and peers have been taken from Thomson Reuters.

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