Regular readers may have seen my article on Monday about National Vet Care, the upcoming Initial Public Offering (IPO) and would-be Greencross Limited (ASX: GXL) hopeful.
In case you missed it here's a quick recap:
- National Vet Care owns one clinic and with the IPO process hopes to attract enough investors to complete the purchase of a further 34, giving the company approximately $50 million in revenue
- This will make National Vet Care the second largest veterinary provider in the country with 35 clinics, behind Greencross with 125
- NVC will acquire 15 more clinics in the first year followed by 10 per year after that, ideally on a multiple of between 3-5x normalised Earnings Before Interest and Tax (EBIT)
- National Vet Care will stick solely to providing clinical services, avoiding the retail sector that has troubled Greencross shareholders lately
- NVC's board includes former GXL General Manager Tomas Steenackers, former Chief Financial Officer (CFO) Wesley Coote, and the chairwoman is Susan Forrester who also sits on the board of G8 Education Ltd (ASX: GEM)
- The offer booklet is expected out in early July, with the ASX debut a few weeks later
There are a number of risks including single-clinic NVC's relative lack of experience with acquisitions and lack of a unified brand; investors will also need detailed information on NVC's finances, margins and so on before buying into the company. Given that 50% of IPOs trade below their offer price in the first year of trading, price is also an important consideration.
Based on a slowing IPO market and the low prices of companies with a similar roll-up growth model, I think there's a fair chance investors will find NVC launching at an appealing price, unlike the exorbitant asking price of some recent launches.
Here's a quick comparison of similar company Price to Earnings (P/E) ratios:
G8 Education Limited – 19.5, forward P/E (for 2015 full-year earnings) 16
Affinity Education Group Ltd (ASX: AFJ) – not yet profitable, Price to Underlying Earnings ratio is ~12
Greencross Limited – P/E of 18, forward P/E of 17
1300 Smiles Limited (ASX: ONT) – P/E of 31, forward P/E of 23
Based on this quick comparison I wouldn't be surprised to see National Vet Care launch with a P/E of 18 or 19. That depends on many factors however, including the cost of the initial 34 centres.
It's not necessarily a good deal either as there are many risks, but a planned acquisition of 15 centres in the first year out could see revenue jump by 40%, and 10 centres per year after that could see growth of 20%, 16%, 14% and 12% for each of the first five years.
The potential appears to be there – now it's all about calculating risk. National Vet Care looks like a small cap well worth further investigation.
