2 Veterinary Stocks - GXL and NVL

Stocks’ Details

Greencross Limited

Growth Momentum to Continue: Greencross Limited (ASX: GXL) recorded decent set of results as sales grew by 9% to $433.3 Mn in 1HFY18 as against of $398.3 Mn in 1HFY17. The total sales were driven by 4.5% Group LFL sales growth and network expansion. Gross margin (%) also got increased by 70 bps YoY to 56.4% in 1HFY18 as against of 55.7% in 1HFY17 due to favourable sales mix and rise in promotional activity during the aforesaid period. EBITDA increased by 9% to $54.4 Mn in 1HFY18 while EBITDA margin was muted down by 20 bps to 12.9% in 1HFY18 as compared to prior corresponding period. However, the top line growth in the first half translated directly into bottom line growth. As a result of this, underlying NPAT has shown growth of 11% to $24.2 Mn as against of $22.1 Mn in 1HFY17. The NPAT margin stood at 5.6%, up by 8 bps on YoY basis. On the other hand, GXL business is performing in line with plan in FY18 YTD and the company remains comfortable with market consensus for the full year result. The Company expects its effective tax rate for the full year FY 18 to be approximately 28%. Additionally, till date in the second half, GXL has opened 2 in-store clinics and has completed 1 vet acquisition, which is expected to contribute to annualized EBITDA of 1 million. Over the years, the group has built a reliable distribution network that can reach majority of its potential market and has a successful track record of developing new products which will support overall growth of the company in years to come.


Cross Shopping and Consumer Spend (Source: Company Reports)

Recently, the company appointed Lucas Barry as its Chief Financial Officer and is expecting his support to grow the integrated multi-channel pet care value proposition across Australia and New Zealand. Macquarie Group Limited and its controlled bodies ceased to be a substantial holder of the Group since 23 March 2018. On the other hand, on average, customers who shop only in retail transact with the company 5 times per year and spend $265, and, Customers who shop across retail, vet, grooming & online transact with the company 25 times per year and spend $1,874. These transactions represent the fruitful growth path across all product verticals in years to come based on its one stop shop approach. GXL stock has been down 17% in last three months but rose about 2.5% in last five days. Based on the growth momentum ahead and the stock trading at a reasonable PE among its peer group, we give a “BUY” recommendation on the stock at the current market price of $ 5.340.
 

National Veterinary Care Ltd

Margins disappoint: National Veterinary Care Ltd (ASX: NVL) seems to be giving a bit of a competition to GXL however some headwinds have led this stock down by about 15% in last three months. NVL reported good performance during the first half of the year with improvement in top-line, operating profit, and bottom-line. The total revenue increased by 27.6% to $41.6 Mn in 1HFY18 as against $32.6 Mn in the prior corresponding period. The sales were inclined due to acquisition and organic growth in its existing portfolio. Underlying EBITDA grew by 5% to $6.3 Mn in 1HFY18 from $6.0 Mn in 1HFY17. This was majorly driven by several key factors such as the acquisition of seven general practise veterinary clinics, the disposal of two emergency clinics, and increased investment in clinic support functions during the same period. However, underlying EBITDA margin in the first half year is lower than previous periods due to strategic investment and higher operational costs (such as wages expenses) incurred during the period. NPAT came at $3.3 Mn in 1HFY18 as compared to 2.6 Mn, up by 27.7% on YoY basis. Despite a decent result for first half of the year, the group did not declare an interim dividend owing to the planned acquisition pipeline. In addition, the group has committed to build strong foundations for the future and focus on initiatives to achieve that will ensure NVL to deliver shareholder value well into the future. 


Key Performance Measures (Source: Company Reports)

NVL has been added to All Ordinaries S&P/ ASX Index effective March 19, 2018, as per the latest S&P Dow Jones Indices rebalance. Further, IOOF Holdings Limited, a substantial holder of National Veterinary Care Ltd, changed its substantial holding on April 20, 2018, from 5.095 per cent of the voting power to 6.157 per cent. Meanwhile, the stock is still trading at a slightly high P/E, and we give an “Expensive” recommendation at the current market price of $ 2.430, while we wait for the second half result to showcase any margin improvements as highlighted in the company’s outlook.

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