A 'rollup' company is a company that buys, rationalises, integrates and runs smaller businesses that it acquires. As the company grows, it can use buying power to reduce costs and acquire and integrate businesses that are far too small to be listed alone.
For example, Sonic Healthcare Limited (ASX: SHL) started by buying a single pathology business in Sydney. It subsequently bought a business in Adelaide, then businesses in other states. Today, it has pathology businesses throughout the world. As a result, Sonic Healthcare should benefit from both the falling Australian dollar and growing demand for healthcare.
A small-cap play that could possibly emulate Sonic Healthcare is Capitol Health Limited (ASX: CAJ). Capitol Health owns and operates 49 diagnostic imaging centres in Victoria. Many investors would be familiar with MRI scans: bread and butter for Capitol Health. Like pathology, radiology is an important diagnostic tool, and is sure to be in demand as a result of the ageing population.
Similarly, G8 Education Limited (ASX: GEM) buys childcare centres. The company currently owns 233 centres, and pays out 65% of earnings as a dividend. Based on the most recent quarterly dividend, the company yields 4.2% fully franked. The Managing Director, Chris Scott, is a proven entrepreneur and the driving force behind the business, which has seen its share price double in the last 12 months. However, earnings growth is driven by acquisitions, so it will get harder for the company to grow as it expands. On the other hand, the company has demonstrated a preference for raising capital by issuing shares, rather than taking on unmanageable levels of debt. It's reasonably likely that earnings, and therefore dividends will continue to grow, providing ample reward for long-term investors.
Another childcare centre operator is the newly listed Affinity Education Group Limited (ASX: AFJ). Affinity listed in December 2013 and currently owns or manages 68 childcare centres. The group currently trades at a forecast, forward P/E ratio of 17.5. Chief operating officer Gabriel Guifre is the person to watch: she owns over 3.2 million shares that are subject to escrow for two years and has extensive experience running a multi-centre childcare business. Because Affinity Education is so new to the ASX, the company is a riskier investment than the other companies mentioned in this article, in my opinion.
My favourite rollup, 1300 Smiles Limited (ASX: ONT) was founded in Townsville and owns and operates dental practices. I don't know of many companies with an average return on invested capital of well over 20%, no debt, reliable and growing dividends and a founding Managing Director who is also the majority holder. Indeed, 1300 Smiles goes one better by demonstrating a corporate conscience: its core business aims to improve accessibility to dental services in Australia, but the company also sends supplies, equipment and volunteer staff to Papua New Guinea to help out people over there.
The MD of 1300 Smiles, Dr Daryl Holmes, respects the business of Greencross Limited (ASX: GXL), which was founded by Dr Glen Richards, also in Townsville. Greencross is Australia's leading veterinary service operator. The company owns and operates 97 pet-related practices, mostly vets, and has recently merged with Petbarn. Unlike 1300 Smiles, the company has taken on a sizeable chunk of debt, but its growth is impressive. The share price has more than doubled in the last 12 months, with the market reacting positively to the recently settled merger.
Foolish takeaway
Rollups are corporate parent companies for vets, dentists, early childhood teachers, radiologists, pathologists and any number of professionals not mentioned here. This list is just a beginning, but my tip is that the best ones are usually run by a professional; be it a dentist, vet or pathologist. Investors will need more sophisticated research to make an informed decision about these companies, but the above list is a good place to start. I personally own two of these companies and they have all performed well for shareholders in recent years.