Is it time to buy Greencross Limited shares?

Credit: -=RoBeE=-

After briefly spiking to a high near $8 a month ago, Greencross Limited (ASX: GXL) shares have since fallen to $6.60 as the departure of the bidding consortium reduced interest in the stock. Greencross had previously received a takeover offer valuing the company at $6.75 per share.

The recent fall presents an opportunity for would-be investors, with Greencross now trading below both what the bidding consortium was willing to pay for the company, as well as below what management believes the company to be worth.

(Greencross management rejected the takeover bid because they believe it substantially undervalued the company.)

With the annual results due out next month, now could be the time to pick up some Greencross shares on the cheap. As a previous company presentation showed, the business has a number of advantages:

  • Total market is growing at approximately 3% per annum
  • Greencross is the largest pet retailer (221 stores) and vet (155 clinics) in the country, well ahead of its nearest competitors which have 127 stores and 37 clinics respectively
  • Yet Greencross controls just 8% of the total market, and is aiming to expand its presence
  • A number of recent initiatives including loyalty programs, private brand pet products, and co-locating grooming, retail and vet clinics are helping to drive sales
  • A number of new stores/clinics are yet to reach maturity, but are hitting break-even well ahead of schedule

In recent times Greencross has slowed the pace of acquisition, partly to focus on moving towards cash break-even point, but also because company research shows that store co-locations (adding a vet clinic to an existing retail store, for example) are a better financial choice compared to making new acquisitions. Greencross will add 21 new stores and 14 co-located vet clinics to its stable this financial year.

There are a number of risks including its funding and debt burden, as well as a weaker economy, which is already hurting the company’s Western Australian businesses. However, Greencross’ financial situation is improving and with the company trading below the recent takeover bid shortly before the annual report, now could be a good time for investors to pick up a medium-risk growth business.

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Motley Fool contributor Sean O'Neill owns shares of Greencross Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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