After a strong set of interim results recently and another takeover bid of $6.75 knocked back as being too low, investors must surely be wondering 'what next' for the Greencross Limited (ASX: GXL) share price.
I see several possibilities:
- Better takeover bid
TPG and The Carlyle Group or other reportedly interested parties like EBOS Group Ltd. (ASX: EBO) could make a higher offer. This would see share prices rise again, although I find it unlikely that Greencross management would accept anything less than $7 per share.
- No takeover bid
The Greencross that looked like a bargain around $5 per share is naturally less eye-catching at $7 apiece. Potentially the interested parties could give up on snagging a bargain and sell their stake, which would likely lead to share prices falling as investors lose hope of receiving a higher bid.
But then what?
If Greencross isn't sold, the range of outcomes available to shareholders grows significantly wider. Potentially, Greencross could continue to perform well. Investors saw limited signs to indicate slowing organic growth, with same-store Vet General Practice sales rising 4.1% (6.2% in prior corresponding period). Retail sales grew 6%+ in all states except for WA which went backwards, resulting in overall growth of 4.3% in same store sales. New Zealand same store sales grew 7.3%.
These metrics, combined with ongoing acquisitions, the total time it takes for new businesses to reach maturity, and a reduction in acquisition expenses compared to previous years could see Greencross continue to outperform in the next 12 months.
Alternatively, Greencross shares could be set for a period of mediocrity. I noted several metrics in the most recent interim results that could deteriorate in upcoming periods.
Greencross experienced a significant boost to its cash flow from a reduction in working capital, and this change was enough to account for the company's free cash flow recently. Greencross also notes that its Like-for-Like sales figures 'represents comparative sales growth in all stores and clinics after 53 weeks of operation' (emphasis added). If working capital reductions were overdone, these expenses could potentially reverse in the next report. Additionally, taking a 53-week period for same-store sales could help to mask any slow-down which might have begun in recent months.
I don't believe the company has done anything improper, but readers should be aware that Greencross could be set for more average performance than the recent report may have indicated.
Foolish takeaway
At today's prices of $7.20, Greencross shares look to trade on a Price to Earnings (P/E) ratio of around 23 times their full-year earnings, and are beginning to look fairly valued. Shareholders who sell today or accept any upcoming takeover offer will increase the certainty of their investment, locking in a fair price.
However, while strong performance continues and the company continues to succeed with its co-location and cross-promotion initiatives, I intend to hold my Greencross shares.
