Why the Greencross Limited share price is falling on today’s results

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The Greencross Limited (ASX: GXL) share price has fallen 4% to $5.91 following its half-year results this morning. Revenues rose 9% to $433 million, with net profit after tax (NPAT) also growing 9% to $23.2 million. Earnings per share rose 7% to 19.7 cents per share, and dividends were increased 5% to 10 cents per share.

(Results look slightly better than this on an underlying basis, if acquisition and restructuring costs are excluded.)

Like-for-like sales growth remained strong, with Vet growing 5.9% and retail sales growing 4% in Australia and 4.5% in New Zealand. Greencross added 6 vet clinics, 3 specialist vet businesses, and 6 retail stores in Australia, and 2 new vets and 2 retail stores in New Zealand.

Pleasingly, Greencross is (almost) funding its own expansion, with the company generating $47 million in cash from operations, reinvesting $39 million in the business, and paying $12 million in dividends and debt repayment. This resulted in a $4 million decrease in net cash. Greencross has $53 million cash in the bank and net debt of $240 million, up from $236 million last year.

While I don’t like that the company basically paid dividends from debt, its financial situation appears stable.

The decision to invest in co-located stores (vet clinic inside a retail store) is paying off handsomely, as is the group’s investment in online technology. Like-for-like sales growth was 7.5% in co-located stores, and there was a 92% increase in online sales as well as a 34% increase in ‘cross shoppers’ (people that shop at more than one ‘proposition’ – vet, retail, and grooming).

Greencross’ outlook for the full year is: “The business continues to perform in line with plan in FY2018 YTD and the Company remains comfortable with market consensus for the full year result” which doesn’t really tell us a whole lot.

Thomson Reuters consensus estimates for Greencross forecast the company earning 38 cents per share for full year 2018, pricing the business at about 16x estimated full year earnings.

I like Greencross a lot and I think it is good value given the further improvements that are likely to be delivered by co-locating vet stores and investing in own-brand products. On the downside, competition in the vet/pet space is definitely heating up, the company carries a fair bit of debt, and is vulnerable to a downturn in consumer spending. Even so, I think Greencross is a buy at today’s prices, and I am looking at making a purchase myself in the future, when trading rules permit.

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Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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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