How long have you held Greencross Limited (GXL)?
Platypus initiated a position in Greencross in February 2014.
What do you like about it?
Greencross has a leading position in pet food and pet accessories retailing as well as in rolling up veterinary practices. They have a track record of delivering impressive earnings growth, and while they are a clear market leader, they only account for a 5% market share. The market remains very fragmented in an estimated $7 billion addressable market.
Greencross (GXL)
Greencross has carried out a successful acquisition strategy of roughly 15 vet practices per year, carefully selected from a pool of circa 40 to 50 each year, based on desirable criteria. Acquisitions are generally made at four times EBIT and Greencross implement best practice, resulting in acquisitions that are EPS accretive within 12 months.
The retail business is also targeting around 15 new locations per year via both acquisition and new store openings. Although both business segments are high growth, the retail business offers Greencross more opportunity to accelerate an already rapid growth strategy.
In addition, the recent merger between the vet business and pet retail store provides a number of significant advantages, most notably the cross selling opportunity through co-location of facilities. Having both businesses in one location has proved a successful strategy in comparable companies in the US and UK. The early signs indicate that Greencross will have the same success.
How is it better than its competitors?
There is no listed competitor in the veterinarian space. The largest non-listed operator has less than 15 practices compared to Greencross’ 105 plus. Competitors are actually acquisition targets for Greencross.
Petstock is the biggest retail competitor, with 96 stores and eight vet practices. Greencross’s much larger vet footprint is a clear advantage to them, with more scope for cross selling and co-location. Supermarkets are also competitors of Greencross retail. Greencross’s advantage is the superior range and depth of products over what supermarkets offer. Greencross is able to offer premium products that suppliers don’t distribute in supermarkets.
What do you like about its management?
The management team includes three co-founders, who retain a significant investment in the company. They are highly experienced and have proven to be successful in the core strategies in which they have been executing. They appear committed to pursuing high and reliable earnings opportunities.
At what point would you sell it?
We view this company as a long-term investment opportunity with several years of strong growth. Management has indicated a goal of 20% market share, at which time the growth may dissipate.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
Greencross has added 0.2% to performance relative to the ASX 300 since we made our first investment.
Is it a liquid stock?
The liquidity has improved dramatically over the last six months, but it is still relatively illiquid, trading roughly 250,000 shares per day or $2 million turnover per day.
Where do you see the value?
The value in Greencross will come from the company’s ability to leverage the large customer base of Greencross vet and Greencross retail. At the moment only 6% of the retail customers use Greencross Vets and only 20% of vet customers shop at Petbarn. Cross sell initiatives are currently being implemented and should start to drive revenue in the near term.
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