Greencross Limited: Growth ahead; clouds on the horizon?

Greencross yesterday reported its results for the six months to 31 December 2011, and the numbers were very pleasing. The future may not be all plain sailing

a woman

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Greencross Limited (ASX: GXL) yesterday reported its results for the six months to 31 December 2011, and the numbers were very pleasing. Revenues were up 32%, net profit after tax up 26% to 2.5m, and earnings per share up 13.5% to 8.2 cents. Operating cash flow was up 53% to $4.5m.

The company also upped the dividend to 4 cents from 3 cents over the prior corresponding period.

Greencross also provided guidance for the full year to June 2012, with revenues forecast to be around $82m, net profit after tax around $4.7m, and earnings per share to be at least 15 cents. The full year dividend is expected to be 7.5 to 8 cents.

The company has acquired 15 new clinics since 1 July 2011, and now runs 73 practices. The company plans to acquire at least 1 new clinic per month for the medium-term.

Aggregation model

As my colleague Scott Phillips mentioned in this article, Greencross is accumulating veterinary practices, and applying a similar model to 1300 Smiles Limited (ASX: ONT), allowing the vets to focus on patients while Greencross looks after administration and managing the practice.

The main difference between the two business models is that dentists pay a fee to 1300 Smiles to manage and administer the practice, so they still work for themselves. With Greencross, vets can choose to work for the company, become a franchise, or engage with Greencross through a joint venture.

See the risk

Investors need to remember what happened to Vision Group, now Vision Eye Institute Ltd (ASX: VGH). Vision Eye Institute operates private ophthalmic services, and manages and owns 18 consulting clinics, nine day surgeries and seven refractive surgery facilities in Victoria, NSW and Queensland.

After taking on too much debt to fund acquisitions, and a niggling concern that harnessing medicos in a public company didn't work, the company's shares fell through the floor, losing 50% in 2011, after posting falling revenues and profits. The company also had to make changes to doctors' remuneration to stop them walking out the door, once their contract expired. Vision was also involved in several legal actions against doctors that had previously worked for the company.

Today, Vision shares trade at 12 cents and the company has a market cap of just $10.5m.

Hopefully Greencross has learnt from Vision's example and has in place programs to encourage vets to stay with Greencross, and to renew their contracts with the company.

Like Vision Group in its early days, Greencross is posting impressive growth, but also has increasing debts, currently sitting at $27m and likely to grow with the company's strategy of acquisitions.

The Foolish bottom line

Personally, I'd like to see the company slow the rate of growth down and pay off some of its debt, and use the cash flow generated from the business to make acquisitions instead of taking on more debt.

At this stage, all I'll be doing is keeping a close eye on the company and watching with interest.

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Motley Fool contributor Mike King doesn't own shares in Worley Parsons. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy. 

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