Greencross Limited

Attractive Acquisition with TPG inked by Board in the absence of superior proposal: Greencross Limited (ASX: GXL) is the largest specialist pet care business in Australia and New Zealand. The company aims to provide the customers with everything they need to ensure the health, happiness, and well-being of their pet. It has an extensive network retail store, veterinary clinics, grooming salons, and dog wash facilities across Australia and New Zealand. Recently, Greencross Limited has entered into a scheme implementation agreement with Vermont Australia, an entity owned by TPG capital to acquire 100% of Greencross shares in the absence of a superior proposal. The transaction price signifies multiple of ~10x FY2018A EV/EBITDA and 44.5% premium to the Greencross one-month volume weighted average. Under the terms of the scheme, GXL’s shareholders will be entitled to receive $5.55 per share, representing an attractive bid for the investors as it holds a higher premium at an aforesaid price.  It was advised that security holders should not take any action at this stage as the detail of scheme meeting is expected to be mailed to GXY’s shareholders in early Q1CY19. Further, the aforesaid scheme is likely to be implemented somewhere in 1HCY19, subject to the conditions of the scheme being satisfied.

Continuing with the financials, in FY2018, the group revenue grew by 7.5% to $878.7 million driven by network expansion and Group LFL sales growth of 4.9%. The online sales grew by 70% in FY 2018 and stood at $20 million, driven by click and collect business. Group gross margin increased by 90bps to 56.3% due to higher gross margin across all divisions. Underlying EBITDA, however, fell by 6% to $97.6 million and statutory NPAT attributable to Greencross shareholders decreased by 51% to $20.7 million as a result of $24.2 million of exceptional items. AS a result, ROE and pre-tax ROA came in at 4.3% and 3.4% in FY18 which is lower than the industry average of 12.6% and 10.9%. Moreover, current ratio stood at 1.13x in FY18 from the previous year of 1.30x, exhibiting degrowth of 13.2% in Y-O-Y basis. This has been under pressure over the past few years. The fundamental performance of the company seems to be weak for the past few years.
 

Expanding its Pet Care Model (Source: Company Reports)

However, the company is optimistic in delivering ongoing revenue growth and earnings growth in FY 2019 driven by the expansion of its proven business platform and delivery of the benefits of its integrated business model. The Group expects to deliver continued strong operating cash flows to support both acquisitive and organic growth in FY 2019.
Meanwhile, the share price has risen 42.22% in the past three months as at December 21, 2018 and trading at a higher PE multiple of 30.76x. Although the stock has yielded positive returns of 25.06% over the span of last six months, it may be driven by investor sentiments.  Hence, one needs to wait for the company’s results post-acquisition to find out the actual synergies from the acquisition with Vermont. Based on foregoing, we maintain our “Hold” recommendation on the stock at the current market price of $5.400.
 

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