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3 business chains spreading across Australia

Some of the best investing opportunities come from stores and businesses that have a small number of outlets but a successful business model. Some are franchises that we see on the streets and in shopping malls, and others slowly merge with or buy out competitors, and expand their presence nationwide.

The early success is replicated again and again, and the more popular ones attract a loyal customer base, and the reputation spreads. Here are three such companies that are expanding their share price along with their business.

Greencross (ASX: GXL) is a veterinary services organisation that operates in a highly fragmented industry which currently has no major market share leader. It operates 97 veterinary businesses with the majority in Queensland. It had revenues of $106.7 million in 2013, and the share price has soared from about $1 a share to $6.75 in the past two years.

Apart from its natural growth of two new veterinary hospitals per year, it plans to acquire one or two existing businesses per month, paying on the average of 3.5-4.5 times historical earnings before interest and tax (EBIT) per business. The veterinary services industry is estimated to be worth $2.5 billion in annual revenue.

Just this month, news has come out that the company and pet products retailer Petbarn has had initial talks of a possible merger. Nothing is definite yet, but a combination of that sort would have strong following given the love and care that Australians give their pets.

For a perfect investing smile, 1300 Smiles (ASX: ONT) is a dental and orthodontic service provider that similarly is growing in a fragmented industry that is mostly made up of single, privately owned practices. It has 24 practices, 22 in Queensland, one in South Australia and one in New South Wales.

In 2014 we should see more organic growth with several acquisitions. Earnings over the past four years have been smooth and steady, and with zero debt, the company isn’t weighed down by loans to fund its growth.

G8 Education (ASX: GEM) owns 184 childcare centres across Australia, 166 which are contracted out, and 18 operated directly. In addition, it has 51 franchises in Singapore. Childcare is a business that every community needs, and in some places it is difficult to find available enrolment for children.

Childcare is a $6.3 billion industry  in Australia, and currently the major industry share leader is privately held Goodstart Learning with 12.4% of the market. According to IBISWorld, G8 Education is in second place, holding 3.3% of the market.

It can slowly acquire existing daycare centres, as many are single, privately held businesses that may not be as profitable on their own, but gathered together can have better economies of scale.

In the past three years, it has raised revenue and earnings over four times, with current net profit of $19.2 million on $174.8 million in revenue. Its share price has gone from about $0.50 to $3.25 since October 2011.

Foolish takeaway

Due to our homogeneous shopping lifestyle and consumer needs, if a business is successful in one city or region, chances are it can repeat that success over and over, and give investors a steady stream of returns as they follow the growth across the country.

When you are out shopping or are using a service, and you like what they do, you should ask yourself, “Is this a publicly listed stockholding company?” If it is, you may be on track in finding your next big portfolio grower.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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