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5 reasons why I think this is the best small cap on the ASX

National Veterinary Care Ltd (ASX: NVL) has a market capitalisation of $106 million and is the second biggest ASX-listed veterinary business behind Greencross Limited (ASX: GXL).

Since it listed in August 2015 its share price has grown by 88% and I think there could be a lot more growth to come for the following reasons:

Growing pet population

The pet population, particularly cats and dogs, has grown at a faster rate than the human population over the last decade. If the pet population can keep growing at a rate similar to the human population then the pet market could be a great industry to be invested in over the medium-term.

Defensive industry

Pets are now an integral part of the Australian family. They are our furry children and we’d be willing to do nearly whatever it takes to make sure they’re well. Pets don’t decide to get sick or injured in accordance with economic cycles, so vets could be one of the best defensive sectors to be invested in.

With increasing use of pet insurance, it allows pet owners to afford vet bills which is good for owner, pet and vet alike.

One thing that I like about National Vet Care more than Greencross is that there is no retail part to its business. Retail is a difficult sector to succeed in and internet shopping could put a dent in Petbarn’s business in the future. By remaining a purely veterinary business this could make National Vet Care a better choice.

Rapid expansion

Management have expanded the business at a rapid rate since it listed. It now has 55 integrated veterinary service businesses after its latest New Zealand acquisition. This is impressive growth considering it had 41 veterinary businesses at 30 June 2016.

A lot of this growth was funded by debt, but as the business increases its profit and decreases its rate of acquisitions then it won’t be too long until it’s possible to fund its growth from profit rather than debt. In the half-year to 31 December 2016 it made $2.6 million of net profit after tax and spent $13.5 million on acquisitions.

Management reported that debt drawn was $27.9 million of the $42 million facility with an earnings before interest, tax, depreciation and amortisation leverage of 2.6 times. Management were confident that combined with the current operating cash flows, this would be enough to fund near-term growth opportunities.

Management

You may think the National Vet Care rise sounds similar to how Greencross started off. The starting and current management comprised of several ex-Greencross staff who disagreed with Greencross’ business taking the shift towards retail.

I think the current management have the experience to do a great job of integrating the acquired veterinary clinics into a high-performing business and improve margins.

Dividends expected soon

It’s pleasing to know that management are so confident with how the business is going that they are expecting to pay a dividend when they announce the annual results later in the year.

I wouldn’t expect a large dividend because most of the earnings would be better off being funnelled into acquiring more veterinary clinics. However, rewarding the early shareholders with a small dividend would be a pleasing start.

Foolish takeaway

If National Vet Care can replicate its half-year result of 4.96 cents per share in its annual result, it’s currently trading at 23x FY17’s estimated earnings. This could be a good time to buy shares, particularly as sentiment regarding Greencross is currently negative.

Being a small cap means National Vet Care’s share price will probably be quite volatile, but over the next three years I think it could be one of the best performing shares on the ASX.

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Motley Fool contributor Tristan Harrison owns shares of Greencross Limited and NATVETCARE FPO. The Motley Fool Australia owns shares of Greencross Limited. 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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