Greencross (GXL)

Fat Prophets

Thursday 15th May 2014

What’s new

The merger completed with Mammoth at the beginning of the year has seen Greencross become the largest integrated consumer facing petcare company in Australasia. The deal combined a high quality veterinary service offering with an established pet product business, and we believe the two already fast-growing companies will prove to be an excellent strategic match.

In addition, management has continued to make bolt-on acquisitions, recently purchasing four new veterinary practices, while also expanding its retail footprint with two new Petbarn shops as well as a new Animates store in New Zealand. The company now has 133 retail stores with 108 under the Petbarn banner in Australia and 25 Animates stores in New Zealand. Management is expecting to have 145 retail stores by the end of 2014.

Outlook

Greencross has demonstrated a successful knack of rolling up high quality businesses and the above recent transactions add to that track record. And, despite this acquisition spree, the opportunity for substantial further growth in both the clinics and retail businesses is underlined by the fact that Greencross’ aggregate share of the Australian ‘petcare’ market is still only around 5 per cent.

Indeed, management is targeting around 20 per cent market share over the longer term, which would transform the business if executed successfully. Consequently, we believe that the overall outlook for Greencross remains strong, underpinned by this year’s transformative merger with Mammoth.

We also see significant integration benefits from the merger. Cross selling initiatives to respective databases will be substantial, with both businesses having well entrenched loyalty programs in place. A longer term plan to co-locate Greencross veterinary clinics in existing and new Petbarn stores will also bolster geographical reach and facilitate further market share gains.

Price

Shares in Greencross have been performing strongly on the bourse, and are up 27 per cent and 60 per cent over the past 6 and 12 months, respectively. The market is increasingly embracing management’s ‘roll-up’ strategy in what is still a very fragmented industry. Furthermore, investors are clearly beginning to recognise the substantial synergies and growth on offer from the recently completed merger with Mammoth.

Worth Buying?

Greencross is a high quality integrated pet service and retail company, well-placed in a segment that is growing rapidly. In fact, ‘pet spend’ in Australia is growing fast, with one of the highest rates of pet ownership (63% of households) in the world, along with the growing ‘humanisation’ of household animals.

We continue to regard Greencross as a highly attractive play on these trends. The shares currently trade on a weighty 31.7 times consensus earnings for the June 2014 year and 24.4 times the following year. While these multiples are certainly not cheap, a strong track record of robust growth, along with substantial synergies over the near to longer term and a growing overall market pie, underpin our investment logic.

Consequently, we believe the stock is worth buying at current levels.

Greg Smith is the Head of Research at Fat Prophets.

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