At Regal, we favour a forward-looking mindset, which affords us the luxury of not being burdened by issues of the past, especially when we believe they are unlikely to impact future performance. A good case in point is the result this week from animal care retailer and veterinary operator Greencross Limited.
Greencross has been a highly successful listed company, starting life as a consolidator of the Australian and New Zealand markets, culminating in its current position as the largest player in the integrated pet care and retail sector, one which is growing at above average rates, driven by the thematic of the increasing humanisation of pets.
This dominant market position came about mostly through acquisition, and like all consolidation plays, there are often mis-steps along the journey. In recent years, Greencross has struggled from a poorly timed entry in the Western Australian market (just before the commodities bubble burst), poor management of inventory which lead to disappointing cash flow outcomes, and a general market distrust of consolidation focused business models. We think these issues are one for the rear view mirror and should not burden investor’s views of what might lie ahead for Greencross.
This week, Greencross announced a 1HFY17 result that topped market expectations, with commendable revenue growth of 14%, translating to EBITDA growth of 11%, underpinned by like-for-like sales growth at its retail and veterinary outlets of between 4% and 6%. Cash generation within the business was also very strong, and gearing levels within the business were further reduced, which is impressive given this comes at a time when Greencross opened an additional 26 locations taking their total number of outlets to over 400, further cementing its market dominance.
With a Price-to-Earnings multiple of 16x, we consider the stock very good value, given the greater than 10% EPS growth expected in coming years as management increasingly focus on organic expansion and efficiency gains within the business that should drive above-average profit growth on a per share basis. We believe these factors should increasingly reward shareholders who are prepared to take a forward-looking view of the potential for the company, rather than one anchored in the recent past.