Goldman Sachs initiates coverage of Pets at Home shares with buy rating

Source of opportunity Pets at Home (PAH) is the UK’s leading specialist retailer of pet food and pet-related products. The robust business model, with high relative market share, relatively low online threat and a highly engaged customer, has delivered positive LFL growth, ahead of the UK retail sector since FY08. From its strong industry position, we forecast PAH can expand its UK store base from 370 stores to 500 stores, while the introduction of capital-light veterinary services drives footfall and increases store profitability and CROCI.

Catalyst PAH report its FY14 results on June 12, 2014. We forecast FY sales of £679 mn and EBITDA of £107 mn. We expect the results to highlight PAH’s robust LFL growth against a mixed retail backdrop and continued solid cash flow generation.
Valuation Our 242p 12-month target price implies 16% potential upside and is based on a 10.5x 12-month forward EV/EBITDAR multiple, reflecting PAH’s growth and returns relative to our pan European retail coverage. It implies a 17.7x 12-month forward P/E multiple.

Key risks We believe the key risks to our target price are changing tastes or shopping habits. As pet food demand is relatively stable across the cycle, we think the key risks to our forecasts for PAH are potential problems with its expansion, a change in consumer preferences or increased competition in the niche areas of specialist food and accessories.

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