Interactive Investor

Pets at Home shares up 16% and could keep going

It's turned into a great tip from our companies analyst. And there's potential for more here.

26th November 2019 18:10

Graeme Evans from interactive investor

It's turned into a great tip from our companies analyst. And there's potential for more here.

A spectacular year for Pets at Home (LSE:PETS) shares got even better today as stronger-than-expected interim results raised the prospect of fresh investor rewards.

The FTSE 250 index stock has comfortably outperformed the retail sector so far in 2019, with the shares having doubled in value from 116p in January to 239.4p today.

This includes a jump of 12% after the company said full-year profits guidance would be towards the top end of City hopes, fuelled by today's 7.8% jump in store like-for-like revenues and underlying profits growth of 18.9% to £45 million.

Simon Bowler, an analyst at Numis Securities, raised his price target by 40p to 340p following the results, which he said paved the way for profit and cash growth in the years ahead. His 2020 full-year profits forecast also increased by £5 million to £93 million.

He reckons profitable market share gains in retail stores and the prospect of profit and cash growth from veterinary services from 2021 onwards underpinned an attractive growth story — meriting his “Pet Shop Joys” title in today's Numis note.

The latest share price rally marks an impressive turnaround for the stock, which floated at 245p in March 2014 only to fall back to 111p by November 2017.

Our companies analyst Edmond Jackson backed the company at 125p in August 2018, when it was the London market's third most-shorted stock. It was also one of his "5 stocks for a durable ISA portfolio in the Brexit years" at 155p.

The progress reflects new CEO Peter Pritchard's four-pronged approach to making the company the “best pet care business in the world”. This includes a target to deliver 50% of sales from pet care services, compared with 35.4% currently.

It now has more than 790,000 customers on subscription pet plans across the group, while a trial of a new pet care centre format has recently been extended to more of its stores.  
 
Pritchard added that market conditions remained favourable, aided by Britain being a nation of animal lovers:  “The UK pet care market is in structural growth and remains resilient against a backdrop of continued consumer uncertainty.

“By providing the complete pet care experience to customers, we are able to strengthen our position and deliver market share gains across all segments.”

This resilience is shown by an impressive two-year rate of like-for-like sales growth of 13%, which puts most other retailers into the shade.

Pets now trades on a forward price/earnings multiple of 15 times, which analysts at Shore Capital said left the company on a slight premium to the wider retail sector. Even though this looks justified, particularly with profits still to return to the levels seen in 2017, they said the investment case looked to be up with events.

Today's half-year dividend was pegged at 2.5p a share, with the company eyeing the potential to return surplus cash to shareholders through a special dividend or share buyback in the future. The dividend yield is currently 3.6%.

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