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Is Greencross man’s best friend?

Ever despaired at the cost of taking Fido for an unexpected trip to the vet or regaled at dinner party stories of the cat’s double hip replacement and the associated cost?

Greencross (ASX: GXL), an operator of full service and specialty veterinary hospitals in Queensland, Victoria and New South Wales, has a track record of consistently growing revenue and profitability at impressive rates through a strategy of acquiring existing vet practices, which it operates under a successful corporate model. Whilst its share price has appreciated considerably over the past 12 months, the case for further long-term outperformance is compelling.

The Australian veterinary industry is highly fragmented. As of July 2012, Greencross estimates that there were approximately 2,659 practices operated under 1,865 separate businesses. Further, most of these practices are operated by ‘baby boomer’ vets who are now looking to retire. Since listing on the ASX in June 2007, Greencross has focussed primarily on acquiring the existing practices of these baby boomer vets and operating them under the Greencross brand.

Greencross also operates specialist and emergency vet centres. These centres stand to benefit from the increasing technological advances that have occurred in veterinary medicine which require expensive specialised equipment and facilities. As a result, there are high barriers to entry in this space.

Consistent with its corporate goal of establishing best practice in the veterinary industry, Greencross recently introduced the Healthy Pets Plus program which, for a yearly subscription fee, provides pet owners with a healthcare plan that allows easy access to veterinary care and discounts on food, medication and additional services. Greencross expects that the pet owners who are members of the plan will visit clinics more frequently and increase their average annual spend on preventive products and services. Greencross has forecast plan membership to grow to at least 15,000 over the next six months.

Revenue for the six months ended 31 December 2012 was $51.2 million, up 29.8% on the PCP. Net profit after tax of $3.5 million was also up 34.6% on the PCP. Greencross continues to fund its acquisitions program with a mix of debt and free cash flow. Currently, net debt/equity is approximately 83.9%, but Greencross states that gearing will trend below 65% as it funds more acquisitions through free cash. Importantly in the current yield driven market, Greencross seems on track to pay a dividend of 10 cents per share for 2012/13, which is 100% franked. Greencross’s company policy is to pay 50% of underlying earnings as a dividend to shareholders.

Greencross shares have risen from around $1.50 per share in January 2012 to a high of $5.55 earlier this month, a meteoric rise by anyone’s standards. However, there remains a strong case for continued future growth given that Greencross has a market capitalisation of $184 million and estimates that it has captured only 4% of the Australian veterinary services industry.

Foolish takeaway

With a history of share price outperformance, a healthy dividend and strong case for future growth, Greencross may very well prove to be man’s best friend.

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Motley Fool contributor Tom McDonald owns shares in GXL.

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