MoneyTalks: Why Red Leaf Securities reckons its time to pamper these ASX pet stocks

MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Red Leaf Securities director Jonathon Howe.

What’s hot right now?

For Howe it’s all about the “humanisation of pets” trend. Australia has experienced what has been described as a Covid-19 pet boom with households owning a pet increasing from 61% to 69% in the past two years.

“Fur babies are the new black,” he said.

“The whole ‘humanisation and premiumisation of pets’ makes me bullish on the sector especially with a lot of pet owners now referring to themselves as pet parents.”

Howe said there is an expanding market, with around 70% of Aussie homes now owning at least one dog or cat and pet owners are spending up.

“People are spending more on their fur babies and treating them like their children,” he said.

Howe forecasts these numbers will only continue to grow as more people look for companionship in a pet.

“Pet needs will continue to grow, as far as recreational and medicinal, and pet ownership is not confined to certain demographics, from inner city living with small cats and dogs, to suburbia and rural areas,” he said.

He said changing unit by-laws are resulting in even greater dog ownership, being supported by body corporates, and increasing recognition of the need of fur baby companionship.

Top Picks

Mad Paws (ASX:MPA)

Red Leaf is extremely bullish on MPA, which Howe described as a one stop shop for pet care, outside of the vet category.

The company offers an online digital platform providing pet care services including sitting, walking, day care, grooming to pet owners.

“They have a diversified revenue model split between e-comm (Pet Chemist), subscription via multiple verticals including Waggly toys & treats, Insurance, Dinner Bowl and Sash,” Howe said.

“MPA is a market leader in Australia with strong industry tailwinds of pet ownership and premiumisation with Aussies pet owners spending more than $30 billion the last financial year.

“The numbers already speak for themselves, with circa 300K unique customers and nearly 700K bookings since it was founded in 2014.”

Furthermore, Howe said there is room to grow with the pet care services industry, which is very fragmented.

“Mad Paws has only circa 4% of the pet care services market, which is predominantly operated by private family mum and dad set-ups,” he said.

“To have more of these operations eventually come under the MPA umbrella will expand the business exponentially.”

Howe said Qantas (ASX:QAN) owns about ~3% of Mad Paws via its venture fund, and is a key referral partner to MPA where you can earn Qantas points when you book a sitter.

He said additionally, 65% of Pet Chemist customers are repeat. MPA this week provided a solid YTD FY23 update at its AGM and is targeting cashflow break even and profitability this financial year.

Toys ‘R’ Us (ASX:TOY)

A key player in the toys space, TOY also have a wide range of pet products, from toys to feeding equipment, toilet training boards and pet pampering products.

“Having access to relatively well priced pet items on demand is yet another way TOY is pivoting itself into new areas, especially now following the recent agreement the company announced with UK-based WH Smith High Street,” Howe said.

“TOY has potential to roll out to 500 stores if certain milestones are reached during a 12-month trial period.

“The business itself already earns close to $40m in sales from the toys segment but is certainly one to keep in mind for pet needs.”

Blackmores (ASX:BKL)

Outside of having people covered with their vitamins, minerals and herbal supplements, BKL also have a range of pet healthcare products via PAW.

“Blackmores offers a range of products for your furry friend including skin and coat health, joint health, digestive health, mental health and wellbeing and ear care,” Howe said.

“The BKL share price does look quite attractive at current levels, so if you are bullish on the health of yourself and your furry friend, this may be a good portfolio additional at these levels.”

Howe said a couple of unlisted pet companies to keep an eye on are Pet Circle, which is likely to list sometime in 2023.

“The last raising of $125m valued the company over $1 billion,” he said.

“Also, Lyka, a kibble company, recently raised $30 million on a valuation of $120 million plus.”

MPA, TOY, BKL Share price today:

Howe and Red Leaf Securities own shares in all of ASX companies listed in this article.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.

Stockhead does not provide, endorse, or otherwise assume responsibility for any financial product advice contained in this article.