Small Caps | Aug 31 2017
Brokers welcome the value accretion that lies in the businesses recently acquired by National Vet Care.
-Margin gains occurring alongside investment in new systems and infrastructure
-Capacity to acquire more centres supported by strong cash generation
-FY18 results could end up being well above broker forecasts
By Eva Brocklehurst
National Vet Care ((NVL)) has indicated significant value accretion lies in its acquisitions, amidst strong organic sales growth from existing business. FY17 results delivered on this call, Shaw and Partners observes, and this has de-risked the investment proposition. Investors appear increasingly comfortable with how the business is being managed and the long-term outlook.
FY17 results were supported by the acquisition of 14 veterinary services businesses that will contribute revenues of $20.3m and operating earnings (EBIT) of $4.6m. A 3c dividend was declared, the first, and an interim dividend will be paid in respect of the first half FY18.
The company expects FY18 operating earnings (EBITDA) to be at least $15.1m. National Vet Care now has a portfolio of 60 veterinary services businesses, including 10 locations in New Zealand. FY18 guidance is for revenue growth of 25%.
Shaw and Partners lauds the discipline which has been evident since the stock listed, as operating metrics have not been ignored whilst acquisitions were sought. As evidence, the broker cites the sale of the B2B emergency business, a welcome decision as this was significantly lower growth versus general practice.
The company has also continued to invest in support, new systems, training and infrastructure. Margin gains have occurred alongside this investment and, importantly, this provides the foundation for long-term organic growth.
The broker notes 95% of its FY18 operating earnings forecasts are now locked in, and the final results could end up being well above forecasts. Shaw and Partners has a Buy rating and $2.90 target.
Canaccord Genuity also suggests guidance makes little allowance for further acquisitions. Given seven veterinary practices will be settled in September and should contribute annualised operating earnings of $2.4m, the broker assumes an additional $1m in acquired earnings in FY18.
A pause is expected in the first half but the broker considers it highly probable that further consolidation will take place. Canaccord Genuity makes modest upgrades to forecasts for FY18 and FY19 of 2% and 3% respectively. The broker maintains a Buy rating and raises the target to $2.83 from $2.75.
Wilsons has a Buy rating and $2.75 target, predicated on the strength of the base business and the potential for value to be added. The broker likes the execution at the top line, organic growth in foundation clinics and stronger-than-expected contributions from acquisitions. The capacity to acquire more centres is supported by strong free cash generation.
Wilsons was not surprised the inaugural dividend was lower than its forecast of 5.5c, given the commitment to growth via acquisitions and the planned investment in infrastructure and business development.
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