Pets at Home, Impax Asset Management, Victorian Plumbing


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BUY: Pets at Home (PETS)

The Competition and Markets Authority’s investigation into the UK veterinary market is a headache, but the company is well positioned

A cloud has gathered over Pets at Home in the form of the regulator’s probe amid concerns that consumers are being poorly served. This has created some uncertainty over the shares, despite the company looking little exposed to the threat given the relative size of its vet business and potential review outcomes.

The pet food and accessories supplier and vet practice operator maintained that its vet growth plan “is not threatened” by the CMA’s move as it delivered full-year results in line with its guidance statement in March. 

Annual retail revenue rose 4 per cent to £1.33bn, while the much smaller vet arm delivered 16.8 per cent growth to take its revenue to £147mn. Gross margin was down at both units, with the overall 123 basis point decrease to 46.8 per cent driven by the retail sales mix and foreign exchange headwinds. 

Underlying pre-tax profits came in at £132mn, a fall of 3.2 per cent on lower retail profits. However, a strong case can be made for viewing the year as one of significant progress despite the earnings contraction. A consumer digital platform launch and new distribution centre were highlights. 

It has been a tough start to the new financial year, with retail like-for-like sales down 2 per cent in the first six weeks against a very challenging comparator which benefited from materially elevated food inflation. Vet growth fell to low double digits. Short-term pain is unsurprising given the factors at play, and management was optimistic enough to announce a new £25mn buyback for this year. 

With a valuation of 13 times forward consensus earnings, a 10-15 per cent discount to UK retail peers according to Deutsche Bank, we remain on board.

BUY: Impax Asset Management (IPX)

A positive investment performance is set against significant net outflows, writes Mark Robinson.

Impax Asset Management’s investments centre on the opportunities arising from the transition to a low carbon global economy. The danger exists that the mandate is pursued from an ideological perspective rather than one that prioritises enhanced returns.

Six out of the investment manager’s 10 largest strategies have outperformed their benchmarks over five years, but it’s difficult to gauge the extent to which transition technologies are dependent on government subsidies.

Commenting on the group’s half-year figures, chief executive Ian Simm said “asset owner sentiment around the transition to a more sustainable economy and associated areas of Impax expertise has improved in recent months”.

That’s a subjective assessment which isn’t necessarily borne out by the interim figures. The asset manager benefited from a 5.9 per cent increase in assets under management through the period, underpinned by a positive investment performance amounting to £4.9bn. The adjusted operating profit fell by 5.5 per cent to £25.8mn.

Unfortunately, some of its European clients have reverted to a “risk-off” stance on this corner of the market, which fed into a £2.7bn outflow through the period. Sentiment hasn’t been helped by the interest rate environment, nor by growing concerns over so-called “greenwashing” — the act of making misleading statements over corporate environmental policies.

Doubts over sustainable investments appear to be more prevalent in the wholesale segment, as Impax confirmed its “institutional channel continues to be robust”, helped along by the widespread entrenchment of ESG mandates.

It’s probable that interest rates have peaked, so private clients could become less inclined to pull funds once rates start to retrace. The good news is that the investments favoured by Impax in its private market strategies are already cash-generative. This supports the income case, which we have previously described as a “pay-to-stay” incentive.

HOLD: Victorian Plumbing (VIC)

The Victoria Plum deal will weigh on short-term profitability, writes Mark Robinson.

Victorian Plumbing delivered flat half-year revenues on a like-for-like basis and a 2 per cent rise in completed orders through the period. That’s a reasonable enough outcome given where we are in the interest rate cycle, but the market seemed less than impressed judging by the share price performance in early trading.

Last month, the company bought a rival online bathroom retailer, Victoria Plum, in a deal worth £22.5mn. The rationale for the deal centred on the “significant strategic value . . . of the Victoria Plum brand and its associated intellectual property”.

The purchase price represents around 0.5 times Victoria Plum’s estimated annual revenue and the new subsidiary is expected to be earnings accretive from full-year 2025. The deal will boost market share gains, but it will have a slightly detrimental effect on group profitability until an associated cost reduction programme is finalised.

The gross margin was up by four percentage points to 50 per cent. This reflects a slightly higher proportion of own brand products within the sales mix, along with lower shipping costs. Trade revenues increased by two percentage points to 22 per cent of the group total, which is modest compared with the proportional increases across the home improvement sector as a whole. Customers have been reticent to purchase what Victorian describes as “big ticket discretionary items”, leading to a reduction in average order value. Victorian notes that there are “early signs of levelling off” on this score.

With no debt on its books and free cash flow up by a third, Victorian exited the period in good shape, although the cash conversion rate leaves room for improvement — receivables crept up through the period. The forward rating of 19 times consensus earnings suggests the market is up to speed.


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