GXL - Greencross Limited

[McLovin]

Re: GXL - Greencross

12 months on the stock is up 150% to $6. Trades at a lofty PE of 70x reported EPS of 8.54. Management said underlying NPAT was $6.4m so EPS is 17.1c - still 35x.

They said they plan to acquire 1-2 practices per month at EBIT multiples of 3-4.5 times. GXL itself trades at 18x.

Not sure how this disconnect works?!

It's hard to see how one make excess return on GXL at this level.

I'm glad I'm not the only one scratching their head over this. Virtually all their growth is from acquisition and acquisitions have been and are more than OCF. It's like the market is ignoring the cost of acquistions and pretending this is all organic growth done on a couple of million bucks capex. How bizarre, how bizarre.

Employee expense still rising, now almost at 50% of revenue. Could this be related to once the old vets retire the cost of getting in a new vet, without a equity stake in the business, isn't as cheap as the business model calls for?

 

[skc]

Re: GXL - Greencross

I'm glad I'm not the only one scratching their head over this. Virtually all their growth is from acquisition and acquisitions have been and are more than OCF. It's like the market is ignoring the cost of acquistions and pretending this is all organic growth done on a couple of million bucks capex. How bizarre, how bizarre.

Spot on. I read a Wilson's report which basically has revenue doubling up in 3 years and EPS pretty much growing inline... when in fact EPS will grow much slower as acquisitions are often equity funded.

Employee expense still rising, now almost at 50% of revenue. Could this be related to once the old vets retire the cost of getting in a new vet, without a equity stake in the business, isn't as cheap as the business model calls for?

It's such a dis-incentive to keep working hard when you get paid out when acquiried. It's a great retirement present / excuse for those who are close. The recent buyout of Sinclair Knight Merz would be a great case study. Buying an engineering consultant which are basically people who could leave any moment... esp the senior partners who on average pocket a few $m. That's not the kind of lump sum that eingeers are used to. Makes you wonder what sort of retention rate they've factored in.

 

[odds-on]

Re: GXL - Greencross

It's such a dis-incentive to keep working hard when you get paid out when acquiried. It's a great retirement present / excuse for those who are close. The recent buyout of Sinclair Knight Merz would be a great case study. Buying an engineering consultant which are basically people who could leave any moment... esp the senior partners who on average pocket a few $m. That's not the kind of lump sum that eingeers are used to. Makes you wonder what sort of retention rate they've factored in.

FYI, the retention rate at engineering consultant firms is abysmal. Staff (the grunts) follow the work and $$$. The business model is no different to most other professional services firm i.e. Partner (owns stock, provides “leadership”) => Manager (desperate to own stock, manages "issues") => Grunt (does the work). Zero competitive advantage - more a case of right time, right place and a sharp pencil on the proposal paperwork.

 

[skc]

Re: GXL - Greencross

FYI, the retention rate at engineering consultant firms is abysmal. Staff (the grunts) follow the work and $$$. The business model is no different to most other professional services firm i.e. Partner (owns stock, provides “leadership”) => Manager (desperate to own stock, manages "issues") => Grunt (does the work). Zero competitive advantage - more a case of right time, right place and a sharp pencil on the proposal paperwork.

Been there myself in my past life so can definitely relate.. although it has been many years since.

Anyway - that's why I can never understand why someone would acquire an engineering consulting outfit... however, Cardno (CDD) has been doing that for ages so may be it can be made to work.

 

[craft]

Re: GXL - Greencross

Earnings accretion growth models like this are ponzi schemes imo. Works a treat whilst GXL can equity fund at 18X. But when the market price rises falter and people look at the underlying business, still arguably worth around what was paid to vendors(or less) The price corrects and the earnings differential creating the EPS accretion disappears – further external growth is then reliant on borrowing which is normally maxed out and limited by the low return on asset ratio. OCF certainly can’t maintain previous growth rates, it normally has a hard time covering the interest payments.

Industry consolidators that don’t suffer a major pull back when the music stops are a rare thing – they must be so much more efficient in operating the business they acquire to justify the higher multiples on an ongoing basis.

How high will it go – no idea.
When will it end – no idea.
Ultimate outcome – pretty predictable.


Sometimes it’s hard being a value investor - the market sirens look real pretty on the surface. But simply, some stocks lend themselves to trading the price some lend themselves to long-term investing. As a longterm investor I don’t see much in GXL I like and that beautiful trending price channel does not change my mind – other than to look for a longer barge pole, or maybe a mop - sometimes there’s something in the mopping up.

 

[McLovin]

Re: GXL - Greencross

Spot on. I read a Wilson's report which basically has revenue doubling up in 3 years and EPS pretty much growing inline... when in fact EPS will grow much slower as acquisitions are often equity funded.

Wilson like WAM or Wilson HTM? Geoff Wilson is usually pretty clued up on these sort of things, I couldn't imagine him coming up with those forecasts??

FYI, the retention rate at engineering consultant firms is abysmal. Staff (the grunts) follow the work and $$$. The business model is no different to most other professional services firm i.e. Partner (owns stock, provides “leadership”) => Manager (desperate to own stock, manages "issues") => Grunt (does the work). Zero competitive advantage - more a case of right time, right place and a sharp pencil on the proposal paperwork.

I think the same of SGN, even though it's a different industry they constantly need to buy agencies because as soon as they do plenty of the talent will jump ship and the returns will start to diffuse.

 

[skc]

Re: GXL - Greencross

Wilson like WAM or Wilson HTM? Geoff Wilson is usually pretty clued up on these sort of things, I couldn't imagine him coming up with those forecasts??

Wilson HTM. Report dated 13 Sept. I just cleared my email trash bin this morning so I can't find the report anymore.

 

[McLovin]

Re: GXL - Greencross

Wilson HTM. Report dated 13 Sept. I just cleared my email trash bin this morning so I can't find the report anymore.

Ahh...that makes more sense. Gotta drum up a bit of business!

 

[craft]

Re: GXL - Greencross

Employee expense still rising, now almost at 50% of revenue. Could this be related to once the old vets retire the cost of getting in a new vet, without a equity stake in the business, isn't as cheap as the business model calls for?

Employment expenses affected by auditors making them put deferred purchase payments through employment expenses to the extent vendors were obliged to remain working in the practices for a period. GXL was trying to capitalise those work outs into Goodwill. Hmmmm

Think one of their one off adjustments was for this issue. So if the auditors won’t let you capitalise labour call it a one off when you make the numbers up for your shareholders –cool.

 

[craggles123]

Re: GXL - Greencross

lol in spite of all that still up nearly 3% today

 

[piggybank]

Re: GXL - Greencross

Hit a new ATH today of $6.38, before closing lower at $6.30.

 

[craggles123]

Re: GXL - Greencross

Up again with another aquisition today.

Where too from here?

Surely the market will wake up soon?

 

[craggles123]

Re: GXL - Greencross

Not sure what impact this will have but Greencross have just announced they are in preliminary discussions with Petbard regarding a merger

http://clients.weblink.com.au/clients/greencrossvet/article.asp?asx=GXL&view=2760997

 

[McLovin]

Re: GXL - Greencross

They're merging with Petbarn. 15x EBITDA. The presentation says the market is $7b in size, but I'm wondering how much of that is people buying Meaty Bites when they do their weekly shopping at Coles, rather than actually going into a speciality store. They've already got 138 Petbarn stores, which leaves me wondering how many more they can build.

 

[craft]

Re: GXL - Greencross

They're merging with Petbarn. 15x EBITDA.

Next years NPAT is proforma @ 10.9M and equity component is 325M
that equates to them paying a P/E of 30!

with the additional 78M in debt taken on NIBD/EBIT will be over 3x

Something nice to say......... at least they used their own overpriced shares to pay for it.

 

[skc]

Re: GXL - Greencross

Next years NPAT is proforma @ 10.9M and equity component is 325M
that equates to them paying a P/E of 30!

with the additional 78M in debt taken on NIBD/EBIT will be over 3x

Something nice to say......... at least they used their own overpriced shares to pay for it.

Lol.

Q. How do you make an EPS accretive acquisition when you are paying PE 30x?
A. When you use your own shares that are trading at PE 36x.

It's almost impossible for them not to make an EPS accretive acquisition using script...

 

[McLovin]

Re: GXL - Greencross

Next years NPAT is proforma @ 10.9M and equity component is 325M
that equates to them paying a P/E of 30!

I bet the Petbarn people don't see it that way.

They said they won't sell until after FY14 results are out. I wonder where the SP will be by then.

 

[piggybank]

Re: GXL - Greencross

I wonder where the SP will be by then.

I don't know either but what I know is that the volume has been increasing over the past 4 sessions.

 

[piggybank]

Re: GXL - Greencross

Still powering on...

 

[piggybank]

Re: GXL - Greencross