CVS Group PLC (LON:CVS) was the market’s top faller on Tuesday as the veterinary services firm warned that its full-year earnings will materially miss market expectations, partly because of higher employment costs due to a shortage of vets.
In a trading update for the half year ended 31 December 2018, the AIM-listed group said its total sales grew by 23.7% year-on-year, with like-for-like sales up 4.0%, while its gross margins declined to 76.2% from 79.5% the year before.
READ: CVS says full-year earnings hit by heavy snowfall, lower-than-expected acquisitions performance
As a result of actions taken, the company said, it continues to see a gradual improvement in clinical vacancy rates for both vets and nurses compared to the start of the financial year.
However, as previously highlighted, the firm said it remains heavily reliant on locum cover, given the continuing industry-wide shortage of vets.
It added: “Consequently, employment costs in H1 2019 are well above H1 2018 due to the increase in sales as noted above, combined with above-inflation salary increases and a significant increase in market rates for locums.”
Over the past two years, CVS pointed out, it has acquired 24 practices in The Netherlands and has diversified into farm and equine practices.
But, it added, early performance from these newer divisions has been disappointing, with financial results falling short of its expectations.
CVS said: “In all these divisions, financial performance has been adversely impacted by the poor support of pharmaceutical companies and we continue to push for transparent and appropriate pricing.”
Earnings under pressure
The group added that, as a result, it expects its first-half underlying earnings (EBITDA) to be broadly flat year-on-year, with its full-year EBITDA to be “materially below current market expectations.”
As at 31 December 2018, CVS said it had net debt of £116.8mln and remains comfortably within its bank covenants and continues to generate positive operating cashflow.
It pointed out that a number of cost savings have been identified across the group, and additional procedures have been implemented over the employment of locums in practices which is expected to see a reduction in locum costs in the remainder of the financial year as a result.
The firm also said it is re-evaluating its acquisitions policy and particularly the multiples it is willing to pay as it believes multiples being sought by practice owners are increasingly above levels, which will deliver acceptable financial returns.
In early afternoon trading, CVS shares were off 25% at 492.00p.
Peel Hunt chops target, estimates
In a note to clients, analysts at Peel Hunt chopped their target CVS to 700p from 1,350p and reduced their 2019 estimates for the group by 10%.
They said: "The company will now hold fire on acquisitions in order to focus on improving the existing operations and reduce debt levels (PHe 2.0x Net debt:EBITDA at y/e). This alters the investment case and puts CVS at a strategic disadvantage to private peers. The shares will clearly fall sharply on this news. If so, there will inevitably be interest from the industry consolidators.”
Pets at Home suffers too
The warning from CVS also put pressure on shares in Pets at Home Group PLC (LON:PETS), with the pets stores operator also operating veterinary services.
Analysts at Liberum Capital commented: “CVS’s update highlights (i) the increasingly competitive nature of the UK vets space and (ii) the market-wide pressures, particularly from rising wage costs, as a shortage of qualified vets persists. Neither of these are new news, but need to be borne in mind when considering Pets at Home’s turnaround strategy for its Vets Group.”