The National Veterinary Care Ltd (ASX: NVL) share price has fallen by 10% after reporting its half-year result to 31 December 2017.
National Vet Care is a veterinary clinic operator business that is acquiring other veterinary practices to expand its business.
Here are some of the highlights compared to the prior corresponding period:
- Revenue increased by 27.8% to $41.6 million
- Earnings before interest, tax, deprecation and amortisation (EBITDA) increased by 12.8% to $6.08 million
- Net profit after tax (NPAT) attributable to shareholders increased by 27.7% to $3.27 million
- Earnings per share (EPS) increased by 12.3% to 5.57 cents
All of the above figures are the statutory figures that were reported and seemingly seem quite positive. The two negatives from the statutory performance were that the EBITDA margin decreased from 16.5% to 14.6% and that the cash conversion dropped to 60% due to acquisition costs and investments according to the company.
However, National Vet Care also reports its 'underlying' performance, which seeks to exclude one-off costs like acquisition costs. Underlying EBITDA only grew by 3.77%, NPAT grew by 1.11% and underlying EPS declined by 11.1%. Management expect the underlying EBITDA margin will be between 16% to 17% for the full year.
A bit of a mixed bag after looking at all the different statutory and underlying numbers.
Management said that the revenue increase was due to acquisitions and organic growth, National Vet Care added seven new veterinary businesses during the half-year. Organic growth in general practice clinics was 3.11% whilst the total portfolio organic growth was 0.56%.
A key statistic to dig further into is the drop of EBITDA margins. The company said that the lower EBITDA margins arose due to increased operating costs, primarily wages and IT costs, following 'strategic investment in people and systems to position National Vet Care to capitalise on future synergies as the portfolio continues to grow.'
Management expect that the EBITDA margin will improve in the second half as the investment it has made hopefully helps the bottom line.
National Vet Care's loyalty Wellness Program has grown to 14,450 members, which represents growth of 23% since 1 July 2017 and four more clinics have commenced promoting the program since 1 January 2018.
The management service and procurement division also experienced growth in the half-year. Since the start of the financial year it has grown by 16% to 392 clinics by 31 December 2017. The current number today sits at 401 and it's now provided to three corporate veterinary groups.
An interim dividend wasn't declared due to the expected strong acquisition pipeline, which I think is a reasonable thing to do if there are acquisition targets. The directors expect to pay a dividend with the full-year result.
Outlook
Management predict that revenue growth will be at least 25% higher than FY17's statutory revenue. Other expectations are that the gross margin will be in line with 2017's margin, the underlying EBITDA margin will be between 16% to 17% and that a dividend will be declared in six months.
Management re-iterated that the sector remains highly fragmented with approximately 2,600 independent veterinary clinics in Australia and New Zealand, which offers a pipeline of potential acquisitions.
Foolish takeaway
Overall, I thought it was a decent but perhaps slightly disappointing report. The EBITDA margin falling is a worry and I hope to see that recover strongly in the second half and improve in time as the business' economies of scale come into play with a growing network.
I still strongly believe that National Veterinary Care will be a market-beating share over the coming years, but the valuation may have gotten ahead of itself in the previous months.
With a three year or more investment horizon I think National Vet Care looks like a good buy at the current price and I will consider buying more when trading rules permit.
