While the muted outlook for the Australian economy in the year ahead will come as a disappointment to investors, on the plus side it means it shouldn't be hard to find a few stocks capable of demolishing the market's returns.
Roll-up businesses employ a strategy of buying smaller rivals in their field of operation to roll-up into a single business and then enjoy efficiencies via the benefits of scale, shared services, geographic expansion and supply side alignment among other things.
Ideally acquisitions should be funded from profits, but in reality the use of debt or equity is common and Australia's benign credit conditions may suit in the year ahead.
Given the business model they carry multiple risks and management's competence in finding the right acquisitions at the right prices is critical as recklessly chasing top line growth is a common road to ruin.
There's no shortage of roll-ups on the ASX, but investors need to choose carefully, so let's look at three with potential to outperform in 2015.
Slater & Gordon Limited (ASX: SGH) $7.31, up 14.1% in 2015
These entrepreneurial lawyers won't be the first brash Australians to arrive in the UK to upset the established order with a different approach to getting work done. They're operating in a fragmented UK consumer legal services market and while acquisitions carry integration risk, so far the strategy appears a success.
The Aussie firm is also reportedly interested in completing what may be a substantial deal for the legal services arm of AIM-listed professional services group Quindell Plc.
The overall strategy is to offer low-cost services while enjoying the benefits of brand power and any successful bid for Quindell may open doors in drumming up new business channels direct to insurers as well as consumers.
Greencross Limited (ASX: GXL) $8.77, up 9.8% in 2015
The pet-care retailer and veterinary services aggregator just posted first half underlying operating earnings of $41.6 million, up 62% over the prior corresponding period. In the financial year to date it has acquired 42 new City Farmers pet retail stores and 8 veterinary practices among a total of 14 new pet-care related clinics added.
Cost savings come about via the alignment of supplier terms and utilisation of shared services and the business also has a tailwind in the progressive willingness of Australians to spend more on pet care. Greencross is forecasting earnings per share of 36 cents for the full year, which means it trades on around 24x forecast earnings. This looks reasonable value for a growth stock with a strong track record.
Retail Food Group Limited (ASX: RFG) $ 7.92, up 37.5% in 2015
Retail Food Group is a franchisor and acquirer of rival businesses in the fast food and coffee industries which just posted an impressive first half to the financial year. Operating earnings of $39.7 million for the half were up 39.7% over the prior corresponding period, with the group forecasting a buoyant outlook.
Some of the outlook's strength would appear to be based on its international prospects with growing interests in China via its newly-acquired ownership of the Gloria Jean's coffee brand. The group recently announced a joint venture into China where it receives a $6 million upfront fee and 20% interest from its local partner in return for a perpetual and royalty free license to operate a number of branded coffee businesses in the country.
Although I would rather the group took a smaller upfront fee for a larger retained interest the business is likely to have many other future opportunities.
