National Veterinary Care Ltd (ASX: NVL) is a provider of veterinary services in Australia and New Zealand. It operates a portfolio of general practice clinics, and partners with independent clinics to form a network of 98 integrated veterinary businesses. It aims to achieve growth through acquisition, as well as organic growth through business initiatives such as its 'Best for Pet' loyalty program.
Recent performance
After a difficult few months, investors in National Veterinary Care were eager to track the performance of its recent Pet Doctors acquisition in New Zealand. The Pet Doctors Group, acquired in October 2018, consists of 23 clinics and 2 training facilities, and represents NVL's largest acquisition since listing on the ASX in 2015.
In February, the company posted revenue of growth of 30% to $54.1 million for the half year, and an underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $8.2 million (up 29.9% compared to FY2018H1). Despite this, net profit after tax (NPAT) was down 19.9% due to acquisition costs, as well as one-off profits reported in the prior year. Shares in NVL have remained stable since the announcement.
Growth by acquisition
One of National Veterinary Care's key growth strategies is through the acquisition and integration of veterinary clinics into its network. Despite consecutively strong periods of headline (revenue) growth, the company's shrinking EBITDA margins represent a concern to overall profitability.
While the company states the synergistic and procurement benefits from optimising economies of scale, the company's shrinking EBITDA margin (underlying) from 15.7% to 15% suggest that they continue to face challenges in integrating these businesses. Organic revenue growth (on a like-for-like basis) for the period of 2.9% also appears to be on the lower end of expectations.
Outlook
National Veterinary Care expects to achieve an underlying revenue growth of 40% above their FY2018 figures and maintain underlying EBITDA margins of between 14.5%–15%. The Best for Pet Wellness Program has been implemented in 81 clinics, and aims to bring in an additional 8,000 members (35% growth) by the end of the calendar year. If the company is able to achieve this growth, it can provide a means to distinguish itself from competitors and strengthen the National Veterinary Care brand.
Foolish takeaway
At the current price-to-earnings multiple of 18, it's easy to see why some investors consider the growth potential in National Veterinary Care to be good value. The main concern is whether its recent acquisitions will bring in the expected growth to justify its cost. At this stage, I would not be a buyer of National Veterinary Limited shares until the company can show improving margins, and the synergistic benefits of these acquisitions making a material impact on earnings.
