Description

Long CVSG (CVSG LN Equity)

Summary

Covid accelerated the ongoing secular trend towards more pet ownership, and increasing spend-per-pet.  CVSG is a rare pure-play on that theme.

CVSG is the 2nd largest vet hospital network in the UK, with a fully integrated offer including diagnostic labs, crematoria, and an online pharmacy.  CVSG has played a leading role in consolidating the UK vet market, alongside Private Equity.  From 2014-2021E, they have averaged +20%/yr EPS growth, driven by +MSD SSS and highly accretive acquisitions of mom & pop vets.

This track record is inclusive of having ‘blown up’ in 2018, when CVSG got out over their skis with several acquisitions outside of their core circle of competence (including attempted expansion into continental Europe and farm animal).  They subsequently stopped doing deals, fixed the Balance Sheet, and are just now getting the M&A machine back up and running, this time re-focused within their core (1-3 site small animal hospitals, in the UK). 

Thesis is predicated on 4 points:

1) Pet care is a secular growth industry, with Covid creating a step-function higher in the pet base, on top of which pet owners are spending more each year on their pets’ health.

2) Runway for strong earnings growth as the result of MSD+ SSS, supplemented by their highly accretive M&A program (supported by an under-levered BS vs. history), and significant room to expand hospital margins back to prior peak.

3) Scarce asset as the only public UK pure-play vet services company, coveted by both PE-backed peers and vet product manufacturers (see Mars acq of WOOF, Nestle stake in IVC) .

4) Trading at a discount to private peers and precedent animal hospital transactions.

Company Overview

CVSG is the 2nd largest vet hospital owner in the UK with ~8% share and ~£500m in annual revenues. The market comprises of 5 national players with 50% of the mkt, with the remaining 50% served by a fragmented tail of independent practices. The market has been consolidating over time and CVSG has played a leading role.

The other 4 large players are IVC (owned by EQT), Vets4Pets (owned by PETS LN a pet product retailer), VetPartners (owned by BC partners) and Medivet.

CVSG offers fully integrated end-to-end services including first-opinion treatments (typical vet clinic visit serving the day-to-day needs of pets), complex surgical procedures, laboratory diagnostic testing, cremation, and an online pharmacy.

Business is broken into 4 segments: Vet practices, Laboratories, Crematoria and Animed Direct (online medicine dispensary).

Vet Practices:

Currently operate 480 practices incl 8 surgical centers of which 449 are in UK, 25 in Netherlands and 6 in Ireland.

CVSG has primarily grown their practice footprint through accretive deals typically buying for 8-10x synergized EBITDAx. Post acq, CVSG typically keeps the local established brand names of the acquired practice. CVSG provides centralized back office support and generates significant cost savings on supplies through bulk purchases.  In a typical deal, they can take an independent vet’s EBITDA margin from LDD% to high-teens%.

Practices split into 4 categories:

• Small animal (70% of practices): classic primary care vet practices for household pets like cats and dogs. This is the bulk of clinics

• Equine: (11% of practices): practices treating horses

• Farm Animal: (11% of practices): clinics treating farm animals. I.e livestock, cattle, etc

• Referral (7% of practices): most sophisticated level of care. These facilities serve pets that were referred by a vet for specialist services including orthopedic surgery and neurology, internal medicine, cardiology, oncology and diagnostic imaging

Within the practices division CVSG sells their own branded pet products under the “MiPet” brand, at a significantly higher margin than third-party products.  This is why pet product companies (especially food) want to own vet hospitals.  More on that below.

Also have a subscription service “Healthy Pet Club” offering healthcare coverage for routine treatments such as worms, flea/tick and regular health checks. Plans start at £14/month.  Healthy Pet Club subscriptions reflect more than 10% of revenues.

Diagnostic Laboratories:

Network of labs performing diagnostic services to CVSG practices (~30% of revs) and third parties (~70% of services). Tests cover a full range of services incl hematology, endocrinology, microbiology, PCR, etc.  This is a scale/density/network business, one that would be difficult to replicate.

Crematoria:

Pet cremation and clinical waste collection for vet practices across 7 facilities. ~50% internal sales/~50% 3rd party sales.

Animed Direct:

CVSG’s online retailer for prescription meds, pet food and OTC drugs. This is a fast growing, low-margin segment.

Financial Snapshot (FYE 6/30)

Consistent +MSD digit like-for-like (LFL) growth over the last 5 yrs including double digit in the lab, crematoria and Animed businesses.

Margins fell on the 2018 re-set, and remain below peak on an apples-to-apples basis (adj for IFRS 16).

Covid:

• In the peak of covid shut down half their clinics and furloughed a significant amount of employees. By July 2020, revenues had recovered to pre-covid levels and they re-opened the majority of practices while permanently closing 7% that were unprofitable. Finished F20 (6/30 FYE) with +1 LFL, including -15 during the trough of Covid.  During the second set of UK lockdowns, vet practices were deemed essential, and did not close.

Current trading:

• Through 6mo ending 12/31/2020, LFL accelerated to +7 (including practices +5).  And has further accelerated to +10 (including practices +7) in the first two months of 2021, driven by the step-up in the pet population + pet spend.

Thesis

CVSG is a scarce/special asset:

• They’re the only pure-play publicly traded vet services company and would be coveted by 1) PE-backed vet peers who are looking to consolidate the vet market, and 2) vet product manufacturers, who buy clinics as a captive distribution channel (see Mars/WOOF, and Nestle/IVC).

• Further, there are strong secular tailwinds for the industry as pet adoption increases and people spend more on their pets. CVSG saw new pet registrations at their hospitals grow 17% in the 6mo ended 12/31/2020.  Those pets will require vet care for the next 10+yrs.

Path to significant earnings growth driven by SSS strength, margin improvement, and a return to accretive M&A:

• Long history of +MSD SSS, having accelerated towards +HSD post-covid.

• Vet practice margin is just 16-17% in F21E (adj for IFRS 16) vs their prior peak of 18% in 2017, which compares to 18-20% for WOOF’s vet practice business prior to getting bought out by Mars. 

• On top of the margin story, CVSG is more aggressively going after accretive M&A, having paused their acq program starting in 2018.  They have significant firepower to do so, with 0.7x debt vs history of 1.5-2.0x.

Trading at a discount to pure-play private peers and precedent transactions:

• CVSG is currently trading at 15-16x NTM EBITDA = 2.8x NTM revs.

• This is a discount to IVC their closest peer who just raised €3.5bn at a reported €12.3bn valuation (from SilverLake and Nestle) on ~25x 2022E EBITDA. This valuation is up 4x from IVC’s last raise 2 yrs ago. Prior to the raise they had been planning to IPO but this has been put on hold.  IVC has ~1500 facilities vs CVSGs ~480 and was just valued at ~€12.3bn EV and  ~25x F22 EBITDA vs CVSG at ~£1.25bn EV and ~15-16x in-place EBITDA and cheaper if vet practice get back to prior peak

• In 2016, IVC was initially acquired by EQT at a reported price of 17-19x EBITDA

• WOOF was acquired by Mars in 2017 for $9bn = 15-16x EBITDA

Disclaimer:

This presentation is intended for informational purposes only and you, the reader, should not make any financial, investment, or trading decisions based upon the author's commentary. Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information's accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision. Before investing in a security, readers should carefully consider their financial positions and risk tolerances to determine if such a stock selection is appropriate. At any time, the author of this report may trade in or out of any securities that are mentioned in the report as long or short positions in his own personal portfolio or in client portfolios that he manages without disclosing this information.

This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to sell or a solicitation of an offer to buy any security.

Catalyst

Continued value creation in excess of the market.

Potential acquisition target by private equity (e.g. IVC) or strategics (e.g. Mars, Nestle).