Greencross Limited (ASX: GXL) is Australia and New Zealand's largest fully integrated pet specialist. Today, pets are considered valued members of the typical Aussie family, ensuring this $8 billion market will continue to grow. Greencross has a huge market presence and offers pet owners a multitude of services. The recent share price of $8.20 is 25% below the peak of $10.78 reached in August 2014 and provides investors a great entry point into this company.
Greencross began 2014 with 93 vet clinics. After a merger with Mammoth in January and the acquisition of City Farmers in July, Greencross now covers the entire Australian and New Zealand pet services market. It has 119 Greencross veterinary clinics and 182 Petbarn and City Farmers stores. It plans to grow through further acquisitions, new store openings and improving efficiencies. With a target of 25 new Petbarn and City Farmer stores, and $20 million in new veterinary clinics in the 2015 financial year, these particular paw prints will keep expanding.
The company has significant growth potential. It currently controls around 7.5% of the Australian pet care market and aims to increase its share to 20%. The integration and cost-saving synergies from the merger and acquisition spree in 2014 are progressing as planned and should be visible in the full year financial results.
Apart from acquisitions, the company is growing in like-for-like (LFL) sales throughout the network. When he last updated the market on 25 November 2014, CEO Jeffrey David reported year-to-date LFL sales growth of 6% and confirmed that, "Greencross remains confident of delivering our guidance of underlying EPS of 36 cents per share in FY2015, representing a 50% increase on FY2014". The market was suitably impressed and the share price soared 10% following the announcement.
Greencross currently has numerous growth initiatives aimed at increasing its operating margin and market share. One is the creation of a cheaper, private label pet food. Another is co-location 'clusters', combining vet clinics and pet supply stores in the same building, which have enormous synergy and cross-selling potential. Up to six co-location clusters are planned to open in 2015.
Here are four key areas for investors in Greencross to watch in the future.
- Investors should keep an eye on the price paid for future acquisitions of clinics and stores.
- Further expansion of existing companies or the entry of new competitors into the market could threaten Greencross. National Pet Care is a potential IPO in the veterinary services sector that could come to market this year.
- The performance of City Farmers acquisition will be essential to watch to be sure it matches the expectations and price tag.
- Several key founding members still serve on the management team and board of directors. Loss of these key executive personnel could pose a significant risk to the business.
Should you buy?
With a dominant market position throughout Australia and New Zealand, Greencross has plans to increase its market share in this expanding industry. Trading on a forward P/E ratio of 23 and dividend yield of 1.8%, Greencross is not a cheap stock by traditional metrics. However, if the management team can successfully execute the business strategy, the current price represents good value. For long-term investors, I would recommend throwing this dog a bone and adding Greencross to your portfolio.
