Our beloved Schnoodle chewed on the family’s finances. A trip to the vet to check a small cyst on his stomach led to a biopsy, another appointment and a $500 bill. Humphrey was fine.
A week later, I stumped up $130 at the vet when the dog was nauseous. Turns out he’d eaten something disagreeable. Another vet trip and antibiotics course fixed him.
That’s after I paid $30 a night for his stay at a dog kennel when our family holidayed. A motel for humans in North Queensland cost about $90 a night, so I’m guessing the dog hotel is fantastic business. What choice do you have without a pet-sitter?
Then there’s pet insurance, annual vet check-ups, council registration fees, grooming and the odd treat.
Yes, the pet industry is big and getting bigger. And stocks such as Greencross (GXL) and National Veterinary Care (NVL) have some lucrative tailwinds (no pun intended).
Australians reportedly spent $12.2 billion a year on pet products and services last year, found a study by Animal Medicines Australia (AMA). About 5.7 million households have a pet and there are an estimated 24 million pets in this country.
Apparently, we spend $600 million on pet clipping and grooming services alone each year.
Two things stand out with pet-industry statistics. The first is growth: AMA found growth on pet spending was 42% higher on 2013. The second is product mix: pet insurance, for example, was much smaller a few years ago, meaning new markets are being created.
As trends go, the “humanisation” of pets has a long way to run. We’re spending more on pets, favouring premium products and outsourcing services, such as grooming, training and accommodation, to specialist providers.
You know it’s getting crazy when the local pet expo has an ice-cream van for pooches and some of the treats look fancier than those sold to humans.
The pet trend has solid foundations. As people have fewer kids, investment in pets is rising. A healthier, ageing population is increasing demand for pet products and services, as people buy new pets or extend the lives of existing ones for companionship or health reasons.
Pet shops are fuelling this growth. Big chains, such as Greencross’ Petbarn, are integrating more products and services and turning their outlets into one-stop formats. You buy pet food, get the dog washed and groomed, and do the annual vet check-up in one go.
The pet industry should grow faster than the economy for the next five years, making pet stocks an interesting proposition at current prices for small-cap investors. Some industry forecasts expect annual growth of 2-3% in that period.
Savvy investors are awake to the opportunity. Quadrant Private Equity in 2015 paid $410 million for VIP Petfoods, a chilled-pet-food business.
1. Greencross (GXL)
Australia’s largest veterinary provider and pet retailer looks the pick of the pet stocks on valuation grounds. Greencross has had a tough few years, falling from a $10.78 peak to $5.88. Investors who bought the company’s $1 shares in its 2007 float are still well up, but Greencross is no longer a market darling.
Greencross is trading well below the $6.75-a-share offer lobbed by TPG and the Carlyle Group in 2016, and quickly rejected.
Now there are fears that Amazon will take a chunk of pet retailing and disrupt the industry.
The Amazon effect on Greencross is overstated. Greencross last month said one in five Petbarn customers bring their dog to the store. The animals cannot roll in their new bed, get washed and groomed, see the vet and sniff other dogs’ butts online.
The market is underestimating Greencross’ integration of vet products and services or the barrier that creates for rivals, at the current share price. Taking the family dog to Petbarn, particularly for an in-store wash, is as much an outing as a standard shopping trip.
It’s a bit like home-improvement fans going to Bunnings on Saturday morning. No online site can replicate that experience, including the sausage sizzle.
The vet industry remains highly fragmented and several pet services can still be bolted on to the major retailers. For example, dog dental and eye services, an expanded pet-insurance offering, pet accommodation (organised onsite) and obedience training.
Greencross’ $5.83 share price compares to an average targeted $6.53, based on a consensus of seven broking analyst forecasts. Morningstar values Greencross at $8.50.
A forecast Price Earnings (PE) multiple of 14.5 is undemanding for a company with a leading position in a growth market. Watch for another takeover attempt if Greencross stays at these levels for too long, or heads lower.
Source: ASX
2. National Veterinary Care (NVL)
Greencross’ smaller rival, National Veterinary Care, impresses. It raised $30 million at $1 a share in an August 2015 Initial Public Offering (IPO) and trades at $2.48, making it one of the better micro-cap floats in recent years.
Like Greencross, National Vet Care is buying up smaller operators and consolidating a fragmented industry. It is a lower-risk play on the pet theme because it has not expanded into big-box pet retail operations.
National Vet Care is growing quickly through acquisitions, having bought and integrated 55 clinics since August 2015. I’m usually wary of micro-cap companies that rapidly buy other businesses in industry “roll-up plays”, but National Vet Care looks reasonably conservative.
Its Best for Pet payment strategy is a winner. The program allows owners to spread the cost of pet healthcare through small monthly payments. That creates recurring revenue streams and overcomes the problems of pet owners deferring regular check-ups for their animal or only visiting the vet if there is a problem.
National Vet Care has rolled out Best for Pet across 38 clinics and delivered an impressive 115 per cent growth in members (10,367) in less than 12 months.
It’s a simple, effective strategy: buy more vet clinics, consolidate them and create economies of scale, and roll out more products across them. Better still, encourage customers to take out regular payment plans for pets and increase company earnings visibility.
National Vet Care expects at least 20 per cent revenue growth in FY17. The main risk is growing competition for vet clinics, particularly from new foreign entrants or private-equity industry prices, driving up acquisition prices.
At $2.48, National Vet Care trades on a trailing PE of 24 times, on consensus analyst forecasts. The stock could be marginally undervalued given a $2.78 price target, based on a limited number of analyst forecasts that are too small to be relied on.
National Vet Care is well run and has good long-term prospects. For now, it looks fully valued for a micro-cap that is growing partly by acquisition, thus increasing its risk profile.
Of the two, Greencross is the better bet at current prices and has higher upside as the integration of its pet products and services quickens. And as Australians spend more on the pets, including cheeky Schnoodles.
Source: ASX
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at July 25, 2017.
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