No Images? Click here VETERINARY NEWSLETTER November 2018 Greencross - Challenging year and potential buyoutThe Chairman’s address at the Greencross 2018 AGM indicated that the year had been a “challenging year for the company”. This is code for “the company performed poorly”. The earnings decreased as a result of disappointing results in its veterinary business. Potential buyers The company confirmed that it was talking with a number of potential number of buyers regarding “credible proposals”. Synstrat’s take on the Chairman’s address was:- Scarcely a week goes by when a vet practice owner doesn’t comment on receiving a steady stream of clients dissatisfied with service at the nearest Greencross practice to their practice. This appears to relate to their inability to have a steady long term relationship with vets which in turn relates to the shortage of vets available to work full time and build up sufficient long term relationships with clients. Veterinary practices are in the relationship business with veterinary care being its by-product. Attempts to market along McDonalds upselling lines such as “do you want fries with that?” don’t work. Experienced vets have long realised that it’s the relationship with the client which is all important. What would a hypothetical new corporate owner do? A likely option is that it would unwind the Petbarn retail business from the veterinary network business and invest more in the Petbarn business. That’s going back to the past but would appear to be a likely option. It might also undertake an exhaustive analysis of the veterinary network and sell off underperforming practices. However this is conjecture on our part. Please pass it on Our Veterinary email list can never be as large as we would like. If you belong to a veterinary group or veterinary chat line and think that copies of our newsletters are of interest to them please email it on and we invite all vets who wish to be on the email list to email cheryl@synstrat.com.au with that request. Practice business advice Advice concerning practice performance, structuring of veterinary partnerships, timing of partnership changes, performance measurement, marketing of practice services etc. For initial discussion on these subjects contact Graham Middleton – if unavailable contact Jenny O’Brien 03 9843 7777 to make an appointment for a face to face meeting or telephone conference – charges apply. Has Vetshare turned a corner? It’s a bit too early to beat the drum and sound the bugles but having wound down and closed its original wholesales business and transitioned to its veterinary buying group business “Independent Vets of Australia” (IVA), there are small signs of green shoots appearing in its financials. It made a loss in the first half of the year of $176,644 which included costs involved in closing the remnant of Vetshare’s wholesale business and a profit of $32,468 in the second half of the year for its IVA business. That’s not enough to shoot the lights out but it is nice to see a tiny speck of profit emerging from the Vetshare disaster even if the net overall loss for 2018 was $144,176. Hopefully the tiny second half profit is a sign that in the current 2019 financial year it will produce an overall profit and give a lift to shareholders who have seen an erosion of net tangible asset backing of its shares. Currently its equity as per balance sheet at 30th June 2018 was $1,064,175 and it had 6,044,292 shares on issue indicating a net tangible asset backing per share of 17.61 cents. This is the way in which the company values its shares. However if optimistically the company was able to produce substantial future profits then:- 1. Those profits will be absorbed into its carried forward losses and added to net tangible asset backing. It’s fair to say it’s a long way away from actually having to pay tax; and 2. At some point a value of its business may exceed its net tangible assets if it demonstrates an ability to produce a profit which is more than a safe return on its net equity. Under those circumstances its shares could attract a premium to net tangible asset backing as does a profitable veterinary practice acquire a proprietorship value which includes a substantial goodwill element. The signs that it is turning a corner are small but promising. Cenversa 2018 Full Year Results · Net Profit before tax increased 16.5% to $2,479,034 · Revenue increased by $6,254,107 to $151,023,973 · Net assets increased by 15.16% to $9,019,408 · A fully franked dividend of 2 cents per share was paid in January 2018 · Net profit after tax was $1,932,440 · Cenvet services over 1,500 vet practices plus over 2,400 pet suppliers and retailers nationally Share Price The last recorded sale of shares was on 26th October 2018 at 82 cents per share as per advice from the company. There are 75,232,962 shares on issue and the company is trading on a high price earnings ratio of 39. Comment While this company is building market share and addressing fundamental issues the reality is that its profit does not justify its share price. Rather those who are purchasing the shares have purchased on the basis that the company will produce substantial long term capital growth and that if and when controlling shareholder Lionel Bloom sells, either in a trade sale or via a IPO and listing, there would be a hope for capital gain. While aspects of its performance have been impressive over several years there is a lot of hard work yet to be done to produce results which justify its current PE. Greencross – update According to The Australian website 5th November, US based private equity firm TPG Capital will offer $5.50 per share for Greencross with Greencross shares closing on rumours of takeover at $4.54 on Friday 2nd November. TPG has reportedly been in Greencross’s data room assessing a purchase of the listed operation for several weeks. Greencross’s current market value is $547 million and the acquisition price including $268 million in debt is about $930 million overall. It equates to 10.5 times earnings before interest, tax, depreciation and amortisation compared to its current 6.5 times EBITDA trading price. It seems to be a bold move, even though $5.50 a share is a long way below Greencross’s all-time trading high above $10. The life of listed health care providers can be tenuous as evidenced by the fact that aspiring listee National Dental Care has just pulled its forthcoming IPO and stockmarket listing through lack of sufficient support. That comes on top of some mediocre trading in a group of West Australian practices it acquired two years ago with the vendors failing to meet their earnout targets as per contract. To some extent corporatisation of dentistry and veterinary services has been paralleled. Original Greencross promoter, Glen Richards, had a group of practices in Townsville and was the moving force, whilst original 1300 Smiles Ltd promoter, and still major owner Daryl Holmes also came from Townsville. It must have been something in the water in North Queensland. However of all of the listed dental and veterinary companies, 1300 Smiles has been the most careful in respect of its acquisitions and has made steady progress albeit it’s had a couple of overreaches. A Canadian group which owns 13% of Greencross’s shares is reported as being opposed to the takeover which is a likely ploy to push the price up a bit. Private equity players such as TPG pride themselves on being the smartest guys in the room but it’s not all plain sailing and we predict that there will be some rocky patches in the Greencross takeover. Just ask any of the myriad of vets who own good practices near Greencross practices about the flow of clients between the two! Best wishes to all Vets, Graham Middleton and the Synstrat Team The Synstrat Group are Australia's most experienced Veterinary practice business advisers, accountants, practice valuers and licensed financial advisers. 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