The National Veterinary Care Ltd (ASX: NVL) share price rose 2% to $2.18 this morning, after the company reported sharply higher revenue and profits, despite slightly narrower margins. Here's what you need to know:
- Revenue rose 71% to $33 million
- Net profit after tax (NPAT) rose to $2.6 million from a loss of $0.3 million previously
- Earnings of 5 cents per share
- No dividend announced, but expected to pay one after release of full year 2017 results
- Like-for-like (LFL) vet sales growth of 3.75%
- Outlook for further acquisitions and statutory revenue growth of at least 20% for the full year
- Outlook for underlying Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) margins to be maintained in line with 2016
So What?
A strong performance from National Vet Care ("NVC"), driven primarily by acquisitions, although the important LFL vet sales also grew. In the short term this could reflect nothing more than the company charging higher prices, but persistent growth over a couple of years would suggest that more people like NVL's services and/or are happy to pay more for them.
National Vet Care has a reasonably straightforward plan for growing the company, which I paraphrase:
- Attract more customers via loyalty programs and better vets
- Train better vets and bring more complex services in-house rather than using external referrals
- Growing by acquisition
- Using buying power and growing scale to both reduce costs and 'partner with' small independent vet clinics
While the other bullet points are important, the biggest opportunity for investors is undoubtedly via acquisitions. With only 54 clinics in the stable at present, each additional clinic acquired reflects a ~2% increase in the size of the business (depending on the size of the clinic). At today's prices, despite a seemingly elevated Price to Earnings (P/E) multiple, it doesn't take too many acquisitions for NVL to become meaningfully larger.
Of course, investors will want to watch that management doesn't get too aggressive with their acquisitions and load the company's debt up to risky levels.
It's also important to be aware of the differences between Greencross Limited (ASX: GXL) and NVC. More than half of Greencross' business is retail, and it has been able to generate significant growth for its vet and retail businesses by co-locating vets inside the retail stores.
Excluding acquisitions, National Vet Care grows mainly through increasing its vet sales, which it will do presumably through a combination of reputation, higher quality staff, and/or higher prices. I find it intriguing that NVC is so vet-focused, with its website proclaiming that: "Veterinary professionals are always first. NVC deeply respects and admires the veterinary professionals in our community and we never tell you how to practice. We simply support you to be the best that you can possibly be."
Given that NVC was founded by some ex-Greencross personnel, one possible implication is that some vets are not a fan of an overbearing corporate entity (Greencross). It may also mean that NVC will find it easier to acquire more clinics. At this point there is insufficient evidence to make any assumptions, or to make changes to an investment thesis, I just raise it as a point of interest.
Now What?
National Vet Care also lacks a couple of vital attributes of bigger competitor Greencross. Its brand is new, its footprint is small (higher costs and fewer scale advantages), and the company lacks a lot of aggregate data that has underpinned Greencross' investment decisions over the past couple of years. That does not mean that NVC is a bad investment, but it faces challenges that aren't immediately apparent by looking at its profit growth and balance sheet. NVC appears a higher risk investment, suitable for a smaller part of investor portfolios, but I don't think it's overpriced and would consider buying shares today.
