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Why I rate Greencross Limited shares a buy right now

Greencross Limited (ASX: GXL) is the largest and most diversified pet care company in Australasia. It operates a network of veterinary clinics, retail stores, grooming salons and dog washing facilities across Australia and New Zealand and provides additional services like pet sitting, training and adoption. It owns the Petbarn and City Farmers brands in Australia and the Animates brand in New Zealand and also has an expanding online presence.

Greencross shares started the year strong, hitting a 12-month high of $6.56 in early January. Since then the share price has been trending slowly downwards, and Greencross stock spent most of March and April trading at a little under $5.50.

However, the price really fell off a cliff in early May, shedding 22% of its value in a single day after the company announced that it would recognise non-cash impairments of between $16 million and $20 million in its full year FY18 results. New CEO Simon Hickey also announced that Greencross would conduct an operational review with the goal of reducing the company’s cost base by $10 million to $13 million annually.

Personally, I think investors have been a little hasty to dump Greencross stock. There is big money in the pet care industry in Australia and Greencross is still the most established company operating in this space. Plus it’s an under-appreciated sector of the economy that a lot of investors still seem to overlook as a source of long-term gains.

But consider these statistics: according to a 2016 report on pet ownership by Animal Medicines Australia, more than 62% of Australian households own at least one pet.

In fact, it’s more likely that a house in Australia will have a pet in it than a child – showing Australians might actually prefer fur babies to real ones. And pet owners spend an astonishing amount on their animals: the report estimated that more than $12 billion was spent on pet products and services in 2016 alone.

Despite being the major player in the industry, Greencross is still capitalising on Australia’s love of pets to deliver some solid growth to its shareholders.

The company pulled in $433 million in revenues for the first half of FY18, which was an increase of 9% on the prior comparative period. Gross margin for the half was up 70bps on 1H17, EBITDA increased 9% to $54 million, and NPAT was up 9% to $23 million. The company declared a fully franked interim dividend of 10 cents per share, which was 5% higher than the previous financial year’s interim dividend.

After the May selloff, Greencross shares are trading at just 12x earnings, which is far lower than the shares of its main industry competitor National Veterinary Care Ltd (ASX: NVL), which trade at almost 28x earnings. Based on this metric alone Greencross shares seem to offer good value to investors.

Greencross shares have already given an indication that they could bounce back pretty quickly. They were up almost 6% on Friday after an article in the Australian Financial Review suggested that the company could make a good takeover target for a private equity firm.

Foolish takeaway

After the recent dip in its share price, I think Greencross offers good value to investors. The pet care industry in Australia shows no sign of slowing down, and there aren’t that many competitors fighting for Greencross’ market share.

New CEOs make a habit of stamping their authority on a company when they first take the reins. But if Simon Hickey can be successful in his operational review it will mean that Greencross might be able to generate its revenues off of a lower cost base.

These times of transition always present risk and uncertainty for investors, but based on the underlying strength of the pet care industry I think Greencross still has ample opportunity to deliver growth for its shareholders.

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Motley Fool contributor Rhys Brock owns shares in National Vet Care. The Motley Fool Australia owns shares of and has recommended Greencross Limited. The Motley Fool Australia owns shares of NATVETCARE FPO. 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 Scott Phillips.

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