One way to find clear-cut growth opportunities in the stock market is by paying attention to mega investment trends. These reflect global changes in society and the economy, unfolding over several decades, and point to products and services likely to be in high demand in future.
Familiar ones are technology and climate change. Demographics is another, covering the growth of the middle classes, increased urbanisation and the rising elderly population, all trends which should help underpin the revenues of companies in sectors such as food production and agriculture, healthcare, pharmaceuticals and surgical devices.
A sub trend, intertwined with aspects of demographics, for example longer life expectancy, changed family structures and rising discretionary incomes, is the pet economy. They are now seen as part of the family with owners willing to spend hefty sums on their beloved (mostly) canine and feline companions. That has led to strong growth in the pet sector.
Companies in the sector include those providing nutrition, medicine, accessories and insurance. Veterinary services is particularly lucrative. One of the UK’s largest animal health businesses, Dechra Pharmaceuticals, was bought out by a Swedish firm last year for £4.5bn, while revenues from the vet services side of Pets at Home are fast catching up with the retail side.
Smaller rival CVS is wholly focused on veterinary services here and abroad. Firms’ main vulnerabilities are competitors, pressures on household spending in economic downturns and the occasional cloud such as the ongoing investigation by the Competition and Markets Authority into anti- competitive practices in the industry.
BUY: CVS (CVSG)
Veterinary group CVS remains committed to its long-term expansion plans, regardless of short-term headwinds and the ongoing CMA investigation into veterinary pricing in the UK, writes Maisie Grice.
Underlying like-for-like sales increased by 4.1 per cent once the effects of a cyber incident in April and cloud migration are discounted. Those events also served to constrain the adjusted cash margin, although ebitda was still 4.7 per cent to the good at £127mn.
CVS has acquired 24 practices in Australia to date, alongside five additional UK businesses. The surge in investment saw net debt increase to £165mn, which meant that the leverage ratio stood at 1.54 times, well up on the 0.73 multiple recorded in June 2023, but still comfortably below the group’s targeted upper limit of two times. The site expansion, along with investments in UK services and equipment, including the rollout of a new cloud-based practice management system, are key to building new revenue streams.
Investec gives an earnings per share estimate of 92.3p, rising to 96.5p in full-year 2026.
Full-year results were a mixed showing, much of which had been foreshadowed, but there was enough to provide encouragement over future trading prospects. The group maintains that, while the pets that were brought into households during the Covid-linked kitten and puppy boom are now at an age when vet visits lessen, the frequency will increase again in a couple of years, as pet life longevity rises. The fundamental need for vet care remains strong, proving the sector’s consistency even when macro conditions change. So the steep share price fall in the wake of the cyber incident has opened up a buying opportunity, with the shares trading at an undemanding 13 times forecast earnings — well below the long-term average of 20 times.
BUY: Playtech (PTEC)
The company will now focus on B2B, assuming the sale of Snaitech goes through, writes Christopher Akers.
Playtech expects to deliver annual adjusted cash profits ahead of consensus expectations after a strong first half, as the outlook for the gambling technology company improves on the back of the removal of a significant legal headwind and the proposed sale of its Italian business-to-consumer (B2C) arm.
Adjusted cash profits rose 11 per cent to €243mn (£203mn) against the same period last year, underpinned by growth of 38 per cent at the business-to-business (B2B) division as profits in the Americas surged. Management now expects B2B to deliver its medium-term adjusted cash profit target of €200mn-€250mn this financial year, which is earlier than expected.
B2B revenue was up 14 per cent in the half, with Mexican partner Caliplay remaining the driver. There was also encouraging trading elsewhere, as Canada and US revenue rose 200 per cent. Playtech raised its investment in Hard Rock Digital, which paid it a €1.7mn dividend, by 54 per cent. The company also made further inroads in the high-growth Brazil market, which is expected to become a regulated market next year; Playtech has exposure to Brazil through its strategic agreement with Galerabet and support of B2B licensees.
After the period end, Playtech and Caliplay agreed terms on a new strategic agreement that will bring to an end legal disagreements, and has seen the resumption of unpaid software and services fees. However, the trajectory of future earnings under the revised agreement still requires some clarification.
Analysts at Peel Hunt expect cash profits from Caliplay to “probably be materially lower” in 2025.
Over at the B2C unit, adjusted profits fell 6 per cent to €131mn on flat revenue. Revenue was down 1 per cent at leading Italian betting operator Snaitech, which the company recently agreed to sell to Flutter Entertainment at an enterprise value of €2.3bn. The transaction is expected to complete by the second quarter of next year, after which Playtech plans to return €1.7bn-€1.8bn to shareholders through a special dividend.
In relation to the sale, a new incentive plan has been implemented, which will see €100mn of bonus awards and a separate $34mn cash bonus pool paid to executive directors and senior management, including chief executive Mor Weizer.
Playtech trades on 16 times forward consensus earnings and seven times EV/Ebitda (enterprise value to cash profits). With the Caliplay legal risk soon to be extinguished, strong current trading and a range of investments that look set to drive profits higher, we remain bullish.
HOLD: TinyBuild (TBLD)
The games developer is not showing many signs of being able to turn around its fortunes, writes Arthur Sants.
Independent games developer TinyBuild shows no signs of recovery as revenue continues to fall on the back of underperforming games.
These results look particularly bad after games developer Team17 published a strong set of results for the same period. The problem is that TinyBuild’s excuse of the worsening “macroeconomic situation” doesn’t carry that much sway any more.
A lot of the issues stem from the disastrous acquisition of Versus Evil. It was supposed to release games last year, but these were delayed until the first half of this year. Now that Versus Evil’s games have finally been released, it seems they haven’t been popular; in the six months to June, Versus Evil released five games yet group revenue still dropped 19 per cent to $18.8mn.
The problem now is that due to cash issues, TinyBuild isn’t investing as much in games development. It spent $8.7mn on development costs, but this was down from $16.9mn in the same period last year. It does have a back catalogue to lean on, but eventually it will need to start producing some new hits as it cannot cut its way to profit growth in the long term.
Chief executive Alex Nichiporchik still has faith in the business, and provided $9.7mn of his own money as part of a $12.3mn fundraising at the start of the year, which leaves it with just over $9mn of cash on the balance sheet. However, given software development costs in the past half-year, this cash won’t was last long unless TinyBuild can start generating profit growth.
It doesn’t seem obvious how the company can start growing again while it is so restrained by its financial position. The market agrees with this view, given its market cap of just over £20mn is less than half its net asset value. TinyBuild exemplifies the high risks of investing in small games publishers — and it is game over for our long-standing buy rating.
