Questor: our refusal to sell CVS at 400p is vindicated – the price has tripled. We’ll hold on

Questor share tip: poor trading hammered the shares last year and we had to resist selling in panic. But CVS is on a firmer footing now

Russ Mould 25 February 2020 • 6:00am

A Veterinarian injecting a dog — Veterinary services group CVS is the leading player in its field Credit: Universal Images Group

This column’s patience with CVS Group is beginning to get its reward now that the shares trade at about £11.50, so we can be glad that we did not panic and sell at barely 400p a year ago, when disappointing news on trading hammered the stock.

Better still, this year’s first-half trading update, published earlier this month, suggests that the worst of the veterinary services group’s woes are behind it.

While the base for comparison will get harder from here, this month’s update offered encouragement on several fronts. First, like-for-like sales rose by 8.4pc, a good step up from the 4pc in the first half of the financial year 2018-19 and the 5.2pc achieved across the whole of the previous year.

Second, gross margins appear to have stabilised. The company – and our investment thesis – were badly tripped up when the firm was forced to use locums to cover an industry-wide shortage of vets, meaning that costs rose much faster than sales. Staff retention has now improved and wages have fallen as a percentage of sales.

Finally, the firm has extended its bank facilities from November 2021 to January 2024 and reduced the amount it can borrow by £20m to £175m. That still leaves it with plenty of headroom but also shows that CVS is now focusing more on organic growth and less on acquisitions.

This is good as it limits financial risk (debt) and operational risk (the purchases could be duds). Less risk can mean a higher valuation multiple for the company’s profits.

CVS has acquired just three businesses since July, against 34 in the year to June 2019 and 52 in the 12 months before that, while net debt has come down by some £5m from the year-end figure of £102m.

This should all mean that CVS is well placed to make the most of its strong competitive position in what is still an attractive market.

Pet owners commit willingly to caring for their animals, while new treatments and technologies mean that the firm can enhance the range of services it offers across its surgeries, laboratories, medicines delivery service and crematoria.

The shares trade on more than 20 times earnings again, with a very modest yield, so they are no longer especially cheap, but they could still be capable of providing steady capital returns for patient holders. CVS appears to be returning to health so shareholders can stick with it.

Questor says: hold

Ticker: CVSG

Share price at close: £11.52

Update: Walker Greenbank

Our speculative punt on Walker Greenbank, the high-end wallpapers and soft furnishings specialist, in December 2018 has produced a useful if unspectacular 9.3pc return and the shares’ resilience in the face of ongoing adversity – although they lost 5.2pc today amid the coronavirus panic – suggests there could be scope for further capital gains.

A trading statement earlier this month revealed a modest 2pc drop in sales for 2019. The Morris & Co and Clarke & Clarke brands performed well. Strong licensing income also supported the top line and this should have helped profits too, while cost reductions look capable of providing further support to margins.

A solid balance sheet means that we can afford to be patient. Walker Greenbank has net cash of around £1m, although this is before lease liabilities and a pension obligation that came to nearly £13m between them at the first-half stage.

A second straight cut in the full-year dividend is on the cards but even then consensus forecasts imply a yield of 3pc or so, while a forecast price-to-earnings multiple of 10.6 (on depressed earnings) hopefully offers the right balance between protection against falls and the chance of gains.

Walker Greenbank still has the potential to pay off for risk-tolerant investors.

Questor says: hold

Ticker: WGB

Share price at close: 82.5p

Russ Mould is investment director at AJ Bell, the stockbroker

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