A tale of investment in AIM – a disastrous start becomes highly rewarding!
A recent meeting with the management of AIM quoted CVS Group (AIM:CVS) offered a useful reminder of the benefits of patient investing and staying the course. Hopefully the veterinary group will offer plenty more excitement over the coming years as it dominates the UK market and expands overseas.
We first invested in CVS Group at the time of its IPO in October 2007 at a price of 205p. The IPO saw selling shareholders place £92.6m value of shares with the market capitalisation on IPO approx. £105m. It should be remembered that 2007 was the year that AIM saw a flurry of IPOs with AIM reaching a peak of 1694 companies in the year.
There was no new money raised by CVS and the Group arrived on the market carrying £28m of net debt and a shareholders deficit of £1.5m. However cash generative and appealing the business model might appear, negative market sentiment was clearly not going to be good news for a business with a somewhat fragile balance sheet of this type!
When it joined AIM CVS was already one of the leading veterinary service providers in the UK, operating 45 veterinary practices (consisting of 128 individual surgeries) nationwide and three veterinary diagnostic laboratories. It was also the UK’s largest employer of vets with 271 employed, representing 2.2% of all vets estimated to be registered and practising in the UK.
The business was established in 1999 with financial backing from funds managed by Sovereign Capital Partners LLP with the objective of consolidating the fragmented UK veterinary services market. It had already completed acquisitions costing approximately £32.9m.
Turnover for the year ending June 2007 prior to admission was £38.9m and operating profit £2.9m.
Simon Innes had been appointed Chief Executive in 2004 and remains in the role to this day. Prior to CVS he was Chief Executive of Vision Express from 2000 to 2004, over which time he built the business up to £220m turnover and 205 practices. The growth strategy that was successful at Vision Express formed the model of that being implemented by CVS.
Notwithstanding the apparent defensive qualities of the veterinary sector CVS subsequently saw its share price tumble from 242p to a low of 79p, a near 70% sell-off. While we didn’t feel brave enough to whole heartedly commit further client funds we retained a position in the CVS for many of our clients and as things started to look more assured started buying again.
Fast forward 10 years to 2017 and CVS has just reported record results.
Group revenue for the year ending 30 June 2017 leapt 24.6% to £271.8m, with like-for-like sales growth for the Group of +6.3%. Of this The Veterinary Practices Division contributed the lion’s share, growing revenue 25% to £247.9m.
Operating profit rose 46.2% to £17.2m, cash generated from operations increased 10.8% to £37.2m and profit before tax increased 58.4% to £14.5m. Basic Earnings per share increased 59.5% to 18.5p.
CVS acquired 62 surgeries in the financial year and now own 432 surgeries in the UK and the Netherlands. In the UK the equine business has also expanded strongly.
The business is now managed across four divisions: Veterinary Practice, Laboratories, Crematoria and Animed Direct. The Veterinary Practice Division remains the core but all areas are performing well.
The development of their referrals business has been a key priority of late and in October 2015 they opened Lumbry Park in Hampshire, a 13,000 square foot state-of-the-art multi-disciplinary referral centre. This provides a full range of specialisms, using the most modern equipment including both a CT and an MRI scanner. Early teething problems have now been resolved and profitability is now around the corner for Lumbry.
The Group has its MiPet own brand range of products and dual language packaging (English and Dutch) has begun to be introduced so that they can also sell their own brand products in the Netherlands.
The Healthy Pet Club loyalty scheme saw over 53,000 pets added to the scheme increasing membership by 20.9% and bringing the total membership to 306,000. The scheme provides preventative medicine to their customers’ pets as well as a range of discounts and benefits. The Group gains from improved customer loyalty, the encouragement of clinical compliance, protecting revenue generated from drug sales, and bringing more customers into their surgeries. Monthly subscription revenue generated in the year increased to £32.5m (2016: £24.0m) and at the year end, the monthly run rate represented 13.4% (2016: 12.3%) of practice revenue.
CVS also now has 14 emergency out-of-hours sites thereby reducing reliance on third parties for the 24-hour cover that vets are required to provide.
The ten sites in the Netherlands are likely to be joined by others in the short term. This will provide a base from which to establish an integrated business in the Netherlands in a similar way to the UK; the Netherlands is 20% the size of the UK market.
The buying group was enhanced by the acquisition of VetShare and they have now negotiated additional annual rebates for members and sell own brand products to them. We anticipate plenty more gains from improved buying terms over the coming years.
The Group also launched its own MiPet Cover insurance in August 2017 with the initial plan to establish the product in their own practices before considering wider marketing.
A MiNurse Academy was launched in January 2015 and has now helped over 300 nurses learn specialised skills.
A vet graduate training scheme continues to grow and 375 graduates have gone through the scheme in the past three years. The scheme is designed to assist newly qualified vets make the challenging transition from university to day-to-day practice.
Other smaller divisions also performed well as the Group is able to benefit from a broader offering with all divisions serving the practices.
As you can gauge from the above, this business is really starting to dominate all aspects of the veterinary market in the UK.
With plenty more growth to go for in the UK, the Netherlands acquisition strategy in its infancy and ancillary activities such as Laboratories, Crematoria and Animed Direct really now starting to come through, the future looks very bright for CVS.
Those brave enough to have bought shares around the 79p level and held on until now will have enjoyed a 1700% return to date.
Investors in many high flying high growth companies such as ASOS or Amazon and Monster Beverage in the US will have similar stories to tell of multiple share price sell-offs before confidence sets in and the share price and valuation moves to another level. Thankfully CVS’ dip was relatively soon after IPO but no doubt there will be other psychological challenges ahead for investors.
Casting an eye back to the IPO and what went wrong in the early days on AIM, we remain wary that CVS doesn’t overdo the gearing. Net debt at June 2017 year end was £100m and there remained plenty of headroom following an agreed £37.5m increase to its existing credit facility. Thankfully the cost of debt is also considerably cheaper now than 10 years ago. Free cash flow of £23.8m highlights the attraction of the business model and evidently if they stopped acquiring there would be plenty of cash available to pay down debt in quick time.
We anticipate further equity raises to support the likely acquisitions in the UK and Netherlands.
Hopefully investors in CVS will continue to be rewarded for their patience!