**Clear market leader with profitable growth record**
Pets at Home is the clear market leader in UK pet product retailing. In FY14 we expect it to generate EBITDA of GBP 110.6m on sales of GBP 668m (margin 16.6%).
Between FY08 and FY13, the sales and EBITDA CAGR was 11%. According to OC&C, at the end of 2012 it had a 12.6% share of the pet food market, with 44% share in the premium „advanced nutrition‟ segment, supported by its own-brand development. In accessories it generated a 32.3% share led by own-brand direct-sourced product and exclusives. With 246 vet practices (138 in Pets at Home stores), it is the close number two in that market, with around 5.9% of the market pro-forma at the end of 2012.
**FY14E-17E CAGR sales of 8.5%, EBITDA of 10.3% pre incentive/plc costs**
The company‟s product markets are expected to have a 4.2% CAGR in FY14-FY17E, according to OC&C. We expect store roll-out (25-30pa) and services growth to lead the company to take further market share, and vet service fee revenues in particular to support profitability. LFL growth averaging 3.5%, on our estimates, is likely to be driven by further growth in premium pet food, improvement in the accessories market and the benefits of retrofitting vet practices and groom rooms into stores. Sales should also benefit from a maturing store profile over the period.
**Vet JV model supports growth and profitability**
By co-investing in practice partnerships with vets and providing space in the flow of traffic in its stores in return for business support and marketing, Pets at Home is able to generate fee income and also, as an additional income stream, to rent store space to the JV, improving return on capital, merchandise sales productivity and building a halo of expertise. We expect modest EBITDA margin expansion from increased penetration of services and leverage over fixed overheads as stores mature.
**Target price 245p (19.5% upside potential)**
Our fair value of 245p is based on a blended average of our DCF discounted back to 12 months from today and the average of core peers trading on an average of 15.4x our Mar-16 EPS forecast.
[+] source: Nomura Equity Research