Berenberg upgrades CVS to 'buy' as organic growth accelerates

Analysts at Berenberg upgraded veterinary services group CVS to 'buy' from 'hold' on Thursday, stating the company had reached an inflexion point following a series of downgrades in 2018 and the start of 2019.

Berenberg believes CVS will return to both growth and positive earnings momentum as prior issues caused by salary inflation had been "largely dealt with", while like-for-likes were accelerating and looked set to remain "strong" into 2020.

"CVS' organic growth has accelerated over FY 2019, reaching 5.4% for the group (4.4% for the core practices division) at the 11-month mark, up from 4.0% (3.2%) in the first half," it said.

"This acceleration has come from a 12% price increase in the Healthy Pet Club scheme in February, which will continue to roll through the membership until H2 2020, and the continued development of CVS' own referrals business, allowing the internalisation of previously outsourced services."

Longer-term, Berenberg expects like-for-likes to be supported by "healthy market trends", with the UK pet market having grown at a 5% compound annual growth rate over the past six years as growing vet spend was driven by higher rates of pet insurance.

The German bank also highlighted a change in migration laws towards the end of the year that could act as a catalyst for further margin recovery and earnings upgrades.

"Alongside longer-term support from structural trends such as increased rates of pet insurance and spend, and private market valuations of competitors, we think there is significant upside to CVS' current share price," said Berenberg which almost doubled its price target on the firm from 550p to 1,000p.

"With a relatively clean P&L (without acquisition-related expenses) and limited capex (circa 3% of sales), we forecast a significant improvement in FY 2020, providing a 6% free cash flow yield."