The Humanisation of Pets Creates Opportunity for Greencross

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

While we recognize the impending threat posed by <a href="https://www.smartkarma.com/entities/409" target="_blank" data-smartkarma-citation="entities:409:1">Amazon.com Inc (AMZN US)</a> across the retail sector, we believe no-moat <a href="https://www.smartkarma.com/entities/18873" target="_blank" data-smartkarma-citation="entities:18873:1">Greencross Ltd (GXL AU)</a> is arguably less susceptible than other types of traditional retailers. We retain our AUD 8.50 per share fair value estimate and regard the stock as undervalued at current levels. In our view, the company’s integrated pet care strategy, which offers grooming, dog washing, pet adoption, and in-store vets, makes Greencross stores a one-stop destination for pet owners, and should insulate the business from online threats such as Amazon. We think its bundled service/product offering and the importance of engagement with expert in-store staff make its business model difficult to replicate by an online-only provider. Nonetheless, we see the online retail market as an attractive adjunct to the Greencross brick-and-mortar business, and expect online sales to accelerate with the Australia-wide rollout of click and collect, which offers in-store collection between three to four hours (depending on order time), in February 2017.We remain positive on management plans to leverage the company’s sizeable database of pet owners, where we think it has a first-mover advantage, with data analytics to tailor its marketing efforts to meet the needs of individual customers and their pets. To date, online sales of pet food and supplies have grown at an impressive 16% per year during the past five years. However, Greencross’ online sales represent approximately 1% of group revenue. In contrast, online penetration is much higher in the United States, estimated to be between 5% and 7%, and growing. Amazon is the second-largest player in this space, accounting for over a third of the online market, having increased sales through subscription services and loyalty programs. That said, we think Amazon can expand the retail online category and benefit players with a bundled offering (like that of Greencross) that does not compete purely on price.With shares trading at forward price/earnings and enterprise value/EBITDA multiples of 13 and 8 times, respectively, we believe the market is underappreciating Greencross’ earnings growth outlook, and the potential synergies underpinning its integrated retail strategy. Our projected five-year EPS CAGR stands at 11% and is underpinned by incremental market share growth, driven by acquisitive growth, coupled with the still-high degree of fragmentation in both Australia and New Zealand markets.Overall, the Australian New Zealand pet care market is growing at 2%-3% per year, broadly in line with GDP growth, supported by the increasing humanisation of pets, improving quality of pet products, and increased outsourcing of services such as grooming, obedience training, and accommodation. We expect the revised small-format retail store should increase penetration into high-density inner city suburban areas. We currently project 300 retail stores by 2021, up from 240 stores presently. Accordingly, we expect Greencross’ revenue growth to outpace industry growth by around 5% on average over the next five years.Analyst: Chris Kallos, CFA

While we recognize the impending threat posed by Amazon.com Inc (AMZN US) across the retail sector, we believe no-moat Greencross Ltd (GXL AU) is arguably less susceptible than other types of traditional retailers. We retain our AUD 8.50 per share fair value estimate and regard the stock as undervalued at current levels. In our view, the company’s integrated pet care strategy, which offers grooming, dog washing, pet adoption, and in-store vets, makes Greencross stores a one-stop destination for pet owners, and should insulate the business from online threats such as Amazon. We think its bundled service/product offering and the importance of engagement with expert in-store staff make its business model difficult to replicate by an online-only provider. Nonetheless, we see the online retail market as an attractive adjunct to the Greencross brick-and-mortar business, and expect online sales to accelerate with the Australia-wide rollout of click and collect, which offers in-store collection between three to four hours (depending on order time), in February 2017.We remain positive on management plans to leverage the company’s sizeable database of pet owners, where we think it has a first-mover advantage, with data analytics to tailor its marketing efforts to meet the needs of individual customers and their pets. To date, online sales of pet food and supplies have grown at an impressive 16% per year during the past five years. However, Greencross’ online sales represent approximately 1% of group revenue. In contrast, online penetration is much higher in the United States, estimated to be between 5% and 7%, and growing. Amazon is the second-largest player in this space, accounting for over a third of the online market, having increased sales through subscription services and loyalty programs. That said, we think Amazon can expand the retail online category and benefit players with a bundled offering (like that of Greencross) that does not compete purely on price.With shares trading at forward price/earnings and enterprise value/EBITDA multiples of 13 and 8 times, respectively, we believe the market is underappreciating Greencross’ earnings growth outlook, and the potential synergies underpinning its integrated retail strategy. Our projected five-year EPS CAGR stands at 11% and is underpinned by incremental market share growth, driven by acquisitive growth, coupled with the still-high degree of fragmentation in both Australia and New Zealand markets.Overall, the Australian New Zealand pet care market is growing at 2%-3% per year, broadly in line with GDP growth, supported by the increasing humanisation of pets, improving quality of pet products, and increased outsourcing of services such as grooming, obedience training, and accommodation. We expect the revised small-format retail store should increase penetration into high-density inner city suburban areas. We currently project 300 retail stores by 2021, up from 240 stores presently. Accordingly, we expect Greencross’ revenue growth to outpace industry growth by around 5% on average over the next five years.Analyst: Chris Kallos, CFA

Amazon Fears Overdone: Greencross Shares Remain Undervalued