Veterinary services firm CVS Group PLC (LON:CVSG) shares jumped after saying trading since the end of the first half has been better than expected.
The company, which provides pet cremation services and owns veterinary practices, labs and the Animed Direct pet pharmacy, said adjusted profit before tax fell by 4.9% to £17.4mln in the six months to the end of December.
Profits were hit by a 10% rise in employment costs at the practice division due to a shortage of vets but the company expects more modest increases of 3% over the next year as it reduces the number of locums used.
READ: CVS Group drops as veterinary services firm warns full-year earnings will materially miss expectations
Revenue gained 23.7% to £1951.1mln and like-for-like sales increased 4%, led by growth at its vet practices.
The practice division delivered a 24.7% rise in revenue to £178.5mln but the gross margin dropped to 77.1% from 80.6% due to a higher proportion of lower-margin business from farms.
Lower veterinary surgeon and nurse vacancy rates led to savings in the cost of locums during the period. The vet surgeon vacancy rate fell to 8.3% in February from 12.2% the same time a year ago while the nurse vacancy rate dropped to 4.0% from 7.2% over the same period.
The lab unit saw revenue rise 5.6% to £9.3mln while crematoria revenue edged up 12.5% to £3.6mln and Animed grew 16.3% to £10.7mln.
CVS declared a dividend of 5p per share, up from 4.5p a year ago.
Net debt increased to £116.8mln from £69.0mln, reflecting £52.2mln of funding on the acquisition of 23 practices and Vet Direct, veterinary consumables, instrument and equipment supply business.
CVS reviews cost base
“In light of the disappointing financial performance in the period to 31 December 2018, the group will focus on the delivery of organic growth from its existing business through a combination of revenue growth, gross margin improvement and a review of the cost base,” CVS said.
“Within the practices division, like-for-like revenue growth will focus on appropriate price increases, an increase in the number of in-house referrals to CVS's experienced team of specialists and the continued promotion of the group's Healthy Pet Club, which provides preventative animal care through a monthly subscription model.”
CVS will push ahead with its plan to expand its referrals business and out-of-hours support for its practices.
For Animed, the group will launch a new warehouse management system to help grow product lines.
Second half starts ahead of expectations
In the second half, the company has seen improved sales growth in the first two months of the period.
In the year to date, like-for-like sales have increased 5% for the group and3.7% for the practice division.
The vacancy rate for veterinary surgeons and nurses have reduced to 8.3% and 4.0%, respectively, resulting in locum spend.
“In light of the above, trading since the half-year end is above management's expectations (as revised at the time of the trading statement issued on 29 January 2019),” CVS said.
Shares rose 17.7% to 609p in morning trading.
Peel Hunt says interims read better than expected
Peel Hunt maintained a ‘buy’ rating and target price of 700p, saying the shares continue to look exceptional value.
“The trading update with the interims reads better than expected, with a pick up in like-for-like sales, improvement in gross margin and a reduction in the vacancy rate,” the broker said.
“This does not remove the issues, but certainly eases any concerns regarding short term issues and the balance sheet.
“We are nudging up our pre-tax profit forecast by 3-5% to reflect the recent improvements.”