Comment: Pets at Home claws its way to a flotation

Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford
Share this article
Have your say

For a nation of pet lovers, the imminent offer of shares in Pets at Home – the deadline for ­applications is tomorrow – is set to attract keen attention.

Not all of it will be totally rational. We spend a colossal amount on our pets and for devotees it never seems enough. It seems an almost recession-free area of household spending.

The market overall for pet care – including food, treats, health products, baskets, rugs, grooming gadgets, accessories, toys, vet services and insurance – is reckoned to be worth £5.4 billion. Do not be surprised, then, if on its stock market debut this company will command a stock market price tag of between £1bn and £1.3bn, putting it comfortably among the UK’s top 250 quoted firms by market capitalisation.

Pets at Home is the UK market leader in this sector. It has more than 370 stores and a 12 per cent share of this spending. And it is market leader in pet grooming services – we are happy to spend more on a pet wash, trim and blow dry at the group’s in-store salons than the average adult male on a visit to the hairdresser.

Overall, total revenues at Pets at Home are running at £590 million annually and underlying profits before interest, tax and depreciation close to £87m. Growth in recent years has been solid. Between 2011 and 2013 sales grew 15 per cent while underlying profits rose 7.6 per cent.

The shares are set to be priced between 210p and 260p, with a minimum investment of £1,000. The redoubtable Investors Chronicle reckons on the basis of its pre-tax profit estimates for the financial year to this March of £80m, and net profit of £60m, the shares would be trading on a forward price-earnings (PE) ratio of 17 at the lower end of the price range and 20 at the higher. The indicative yield is reckoned at between 1.8 per cent and 2.4 per cent.

As for debt, some £316m of the proceeds will be used to reduce a daunting £548m debt pile. The rating, says the IC, “is pretty punchy for a retailer, the dividend yield is average, and the debt is not exactly low”.

That may not deter pet devotees, who will argue this is a market where spending is never likely to decline. This is not a share for starter investors – there are better dividend yields around, and there are other share offers in the pipeline this year. But a hectic first day of trading is assured.

Tortoises avoid the boom and bust cycle

It is hard to recall now the dark mood of investors in the aftermath of the Lehman Brothers crash in late 2008. By March 2009, the FTSE 100 had fallen to 3,512 points; investors were pulling out of shares and scrambling for the safe haven of cash – assuming they could find a bank they could trust.

But, as so often, the blackest of periods is followed by recovery – though few foresaw a recovery of this scale. According to the Trustnet website, the average fund in the Investment Management Association universe has almost doubled investors’ money.

The average pure equity fund has returned 131 per cent. Only 25 of the 2,245 funds have lost money over the period, 1.1 per cent of the total. Most were in gold shares, property or niche fixed-interest markets.

Investment trusts have fared even better than their open-ended counterparts, with the average one returning 147.4 per cent since 3 March 2009. Acorn Income Investment Trust has returned a breath-taking 670 per cent – a £1,000 investment on 3 March, 2009 would now be worth £7,696, according to FE Analytics data.

Global giant Scottish Mortgage Trust, managed by James Anderson, has returned more than 300 per cent since March 2009, making it the best performing trust in the IT Global sector. Trusts specialising in the smaller companies sector have done particularly well. By contrast, funds focused on emerging markets fared less well.

“If only we had put in a few thousand pounds back then” is the popular reaction. But back then, very few people had any appetite to invest. There was a widespread fear that it would be years before investors would see much of a return.

In fact, 2008 was the worst on record for equity fund sales and more than £1.1bn was pulled out. Last year, investors poured in £11bn.

The best approach is one long advocated here: feeding in small amounts on a monthly basis. The returns won’t be as spectacular as those from lump sum investment made on the day the market bottomed. But it is a way of avoiding those treacherous swings of mood . And with dividends re-invested, the “tortoise” approach can do very well for those who stick with it.