Nearmap limited (NEA)
The company recently announced that it has made its first commercial sales in the USA. Nearmap has successfully sold annual subscriptions of its photo mapping product and data services to a number of SME and local government departments in several US States on commercial terms. SME’ s and government clients were early adopters of nearmap’s products in Australia and a similar roll out program is underway in US. This endorsement go towards validating nearmap’s value add and competitive offering. Nearmap entered the US market in October 2014.
Key Metrics (Source - Company Reports)
The US market presents a compelling opportunity for nearmap. The company embarked on a US Test capture program focused initially on the California market. This initial test enabled the company to establish supply chain and logistics capabilities using both Hyperpod and Hypercamera. The test program was a success and the company quickly expanded the scope to capture US population, including the main cities on East and West coast and part of the Midwest.
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Value Metrics (Source - company Reports)
The company’s international expansion will leverage off learning’s from Australian operation till date. The underlying business is scalable and capital light and the cash generative Australian business will provide the footing required to establish an offshore business with critical mass. The company operates a subscription business model. The basis of the business model is the ability to retain existing customers annually and increase the value of relationships over time. The company experiences little churn from the existing customer base, and it is becoming increasingly effective in growing revenues from inside sales. This is achieved through a combination of transparent pricing and provision of analytical tools and applications that drive data consumption while providing the users with high quality.
Having proving the subscription based business model the challenge is now laying groundwork for sustainable growth. During last year, company introduced advantage pricing, a pricing model based on data consumption. Advantage pricing along with initiatives to drive data usage and increase penetration into customer’s businesses are aimed at monetising the increased utility from the products, thereby generating annuity revenue streams. The company implemented a new capture program, thereby increasing the coverage of Australian population from 75% to 85%. The successful development and deployment of Federal Aviation Administration (FAA) approved hyper camera system, together with a patent for aerial camera system, validate the focus of company’s strategy on research and development.
NEA Daily Chart (Source - Thomson Reuters)
The company has built a world class in house research & development capacity led by CTO Paul Lapstun. Research & Development is the key for the company to maintain its competitive advantage. Over the last year the company continued to invest in its innovation programs related to both hardware & software. Hypervision improved its performance and the quality of photomaps was improved. Hypercamera is fully operational in both Australian and US markets. Hypercamera is a game changing technology for nearmap. It is fully FAA compliant, low cost and offers fully operational flexibility as it can be deployed in a variety of different aircraft types. Last year the company took a decision to focus on leveraging the legacy database in order to drive sales while the company invested in its capability of its platform to support a range of different subscription products. With this focused engineering product completed the company now has a world class and highly stable platform that is ready to scale and can fully support marketing related acquisition activities.
The company-achieved profitability last year with virtually no marketing spends. The company successfully launched three marketing platforms Rall, Solar and Property aimed at increasing penetration in high value verticals. In the coming year, nearmap will introduce focussed marketing targeting key verticals. The company also signed a world-wide contract with Google maps, which along with its move to host content on Amazon Web Services in the prior year will emphasise the scalability of Nearmap platform.
Last year the company registered a 62% increase in revenue and profit before tax of $3.5 million. Strong cash receipts from sales enhanced healthy cash position with a cash balance of $23.3 million and no debt at year’s end. The current ratio of company is greater than 1.5, which is an adequate ratio. Last year was the maiden year of profit for the company.
The company is currently trading at a stock price of $0.595, which is exactly between the 52 week high of 0.600 and the 52 week low of .590. At the current price the company is trading at a Price to Earnings multiple of 29.210. There are other companies in the sector are trading at a similar P/E ratio.
Given the combination of low churn, high retention, inside sales and new sales leading to growth of the company, we believe that the stock is a buy at the current price of $0.63.
Greencross Limited
Greencross Limited (ASX:GXL) has more than doubled its size of stores and clinic network since 2012 to 329 outlets in 2014, and posted an increase of 33% in its size as compared to 2013. The group has a developed its network to reach 59% of ANZ pet owning families through acquisitions and new stores. Green cross acquired over 42 city farmer stores and integrated them into its network resulting into 26 additional outlets. Greencross bought 18 vet clinics which are estimated to post around $31 million of annualized revenue. The firm has over 130 total clinics and is seeking to increase its 3 co-vet clinics to 5 by this year end. GXL raised around $3 million for its charitable activities and used these funds to save animals, bringing the total number of animal lives saved to around 20,000.
Market Opportunity
The pet sector is growing in Australia and New Zealand and GXL is seeking to develop a strong position in pet services market by growing its presence in operating vet clinics as well as through big box format retail stores. The overall pet care market has been performing above average and is expected to post a growth of over 4% per annum to reach over $11 billion in 2020. Moreover, GXL has a current potential market of over $9 billion, and is striving to target this opportunity by focusing on premium products and services and implement a solid supply chain network in retail business. The company wants to grab over 20% market share in this lucrative and steady growth market. GXL wants to improve its 199 retailstores in ANZ to 325-375 retail stores in ANZ, going forward.
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Australian market share and retail store network target (Source: Company Reports)
Key drivers of the growth in the pet sector
Based on the survey conducted by ANZ pet owning households in Feb/March 2015, 63% told that they value their pet as a family member, while 37% reported that they treat their pet as their own child. This growing trend of pet humanization is driving the consumers to go for higher quality food, accessories and treats. The consumers are choosing a high nutrition foods with dietary supplements as well as opting age specific foods. As most of them see their pet as a family member, they are choosing specialized medical procedures, leading to the growing demand for pet insurance penetration rates. Moreover other services like grooming, dog minding, pet hotels, training & obedience, travel, pet crematoria are also seeing increasing demand. Green cross has well positioned itself in this fragmented market offering services ranging from food, veterinary, Services like Groom, Train, Board, Burial, Cremation, Insurance, Healthcare services, accessories, toys and other pet products.
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GXL market opportunity across the segments (Source: Company Reports)
Meanwhile the firm also intends to create value by enabling the customers to make use of its goods and services- through its existing outlets as well by opening new outlets. Only 40 retail stores have a grooming salon out of 172 retail stores in Australia. Eighteen vet clinics have a grooming salon out of 104 GP Vet clinics in Australia. Around 20% of the vet and retail outlets share a catchment area while just 10% of the firm’s locations offer all three provisions under the same catchments (with 13 retail grooming, 11 clinic grooming). On an overall note, only 30% of the firm’s network offers both retail outlet as well as vet clinic. Greencross wants to offer full suite of products and services to its existing customers and work towards this objective. The firm sees lot of potential on this regard as only 0.4 million households with pets has access to all the three GXL’s services, out of 4.9 million Australia’s households with a pet.
On the other hand the shares of GXL plunged over 28.8% over the last three months, partly impacted by the decrease in firm’s 2015 earnings guidance during May. Management expects GXL to post an underlying earnings per share in the range of 33.5 cents to 35 cents during the fiscal year of 2015, which is below its earlier estimates of 35 cents per share. Moreover, investors’ concerns over the high debt levels, cash generation and lacklustre margins have also been some of the key concerns for the downfall of the stock. However, the steady demand in the sector for premium and private label products, GXL’s value creation efforts across its network and huge addressable market are expected to drive the shares of GXL in future. We believe the negative impact of lower earnings guidance have already been factored in the shares of GXL, and the stock is positioned to post returns going forward.
Based on the foregoing, we give a “BUY” recommendation to GXL at the current target price of $5.96.
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