The Australian Financial Review's Street Talk section shone some more light on the upcoming National Vet Care ("NVC") Initial Public Offering (IPO) this morning, with a first enticing look at potential price, forecast earnings, and dates.
The What:
- NVC has contracts in place to buy 35 veterinary clinics, with the purchase to be funded by the IPO funds
- Expects to earn $53.2 million revenue in the 2016 financial year (which begins in 5 days)
- Expects $9.6 million Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA)
- Will raise $30 million at $1 per share, for a total market cap of $50.7 million
- This will value NVC at 10.9x forecast 2016 profit, and 8.2 times forecast 2016 EBITDA (after non-controlling interests)
- Bookbuild expected to run on July 6, prospectus out on July 8, and trading to commence on August 5
So What?
As I have written before in articles here, and here, National Vet Care presents an extremely interesting proposition. It employs the roll-up strategy used with so much success by Greencross Limited (ASX: GXL) – without the burdensome retail element – and aims to grow organically through a 'wellness' program and employee upskilling.
The board and management look likely to include a number of Greencross alumni, while the board chair is also on the board of G8 Education Ltd (ASX: GEM), a company with a similar roll-up strategy.
Certainly all the building blocks appear to be in place for a solid veterinary company. What may turn investors off is the fact that NVC currently has only one clinic, and IPO funds are going towards buying the next 35.
Or to put it another way:
"Give me $30 million, and I'll build you the second biggest vet clinic business in Australia".
If the IPO is successful it could be a sign that Chief Executive Tomas Steenackers missed his calling – he should be selling ice cubes to the Inuit.
Now What?
I am traditionally bearish on IPOs – I've never participated in a single one – and my personal rule is 'assume that they're going to muck it up'.
'Assuming that it all goes pear-shaped, would I still be happy to buy shares in this company?' For many recent launches – already priced to perfection – the answer has been an emphatic no. Given that NVC is going to be increasing the size of its business by 35 times, I see a larger than usual potential for things to go wrong.
A relatively low asking price compensates for this somewhat, and I find it comforting to know that NVC is not being sold by private equity sellers looking to maximise their profits and quit the business entirely. In my earlier articles I said that I wouldn't be surprised to see NVC trade on a P/E of 18 or 19.
The asking price looks to be substantially cheaper than that, and allows for some of the greater risks investors are taking on.
There are still many unknowns – particularly regarding the gritty details of the clinics and how aggressive the growth strategy will be – but National Vet Care is shaping up to be a very interesting small-cap stock.
