As I covered yesterday, Greencross Limited (ASX: GXL) management recently rejected a third, increased buyout offer for the company from a consortium led by TPG Capital and The Carlyle Group over the weekend.
After the release of the interim results this morning, it's easy to see why. Greencross knew exactly what its shareholders and would-be buyers were looking for, and it put the information up front.
Here's what you need to know:
- Group revenue grew 18% to $363m
- Underlying (excluding significant items) Net Profit After Tax (NPAT) rose 11.5% to $21m
- Underlying Earnings Per Share (EPS) rose 8.5% to 18.7 cents
- Gross margins (revenue minus cost of goods sold) expanded by 2.4% to 55.6%
- Dividends per share rose by 1 cent to 9 cents per share
- Like-for-Like (LFL, or 'same store') sales grew 5.1%
- Generated free cash flow of $15.3m
- Total cash of $54m and total debt of $274m as of 31 December 2015
So What?
A solid performance that no doubt ticked a lot of boxes for shareholders. Rising revenues and profits from growing same-store sales as well as an increasing number of stores speaks for itself. Expanding margins came from the acquisition of new specialty businesses as well as a focus on higher margin veterinary procedures, which were sufficient to offset an increase in sales of lower margin products like food.
Greencross recently refinanced its $350m debt facility ($274m drawn) at lower effective interest rates (5.2%, down from 6%), as well as acquiring an additional $50m 'accordion' facility and an extension in expiry date out to 2020.
On the downside, poor performance in Western Australia continued with same-store sales actually shrinking, confirming that demand for pet care is elastic and vulnerable to an economic downturn. However, it's an open question whether the rest of Australia is likely to suffer a downturn as severe as WA, which has a very mining-centric economy.
The improvement in cash flows came largely as a result of fewer acquisitions, although a fortuitous shift in working capital requirements, from an $11m outflow in the prior corresponding period to a $7m inflow appears to account for much of Greencross' free cash flow over the past six months.
Management attributes this shift to a reduction in trade and other receivables due to improved collections, as well as reductions in in-store inventory.
Now What?
The question of the hour is whether shareholders can expect a higher takeover bid from potential buyers. I have no idea, although today's report confirms management's recent stance on the bids was correct and I continue to believe buyers will have to offer north of $7 per share to get shareholders interested.
Continued strong Australian sales growth despite the commodity downturn confirms that Greencross' model is successful, although shareholders will want to watch for deterioration in the domestic economy. A significant chunk of Greencross' total assets are intangible, which could result in savage write-downs if the company's business suffers. For this reason I would also be wary of over-extension should the aggressive expansion of recent years start up again.
As it stands though, today's results were of very good quality and I continue to believe both that Greencross is undervalued and that it is a good buying opportunity for investors today.
