Is it time to follow directors and buy shares in PetBarn owner Greencross?
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Directors buying their own company’s shares is often a bullish indicator for other investors to follow suit, since management should have a good idea how their company is travelling.
But for PetBarn owner Greencross (ASX:GXL), even with directors buying its shares recently, winning investor support so soon after its recent travails may prove a hard ask.
The group operates a chain of veterinarian outlets across Australia and New Zealand, along with the PetBarn retail stores.
An approach from private equity bidders offering $6.75 in cash was rejected in early 2016 as it “fundamentally undervalued” the company, directors said at the time.
Since then, Greencross has fallen on hard times and despite occasional rumours that bidders could return, the share price is holding at around $4.45, well below the level bidders offered a few years back.
A profit warning in May saw Greencross shares dumped, falling quickly to below $4 from $5.50, before they found support.
That profit warning followed the appointment of a new chief executive, Simon Hickey, earlier in the year. He has outlined a series of write-downs along with a targeted attack on the company’s bloated cost base as he moves to get operations back onto an even keel.
But is it too soon to buy? Citi thinks so, warning clients that Greencross’s underlying business may remain under pressure.
“While we do not rule out another [private equity] bid, especially given the share price weakness, we believe underlying conditions have become more challenging, since the last bid, given i) online competition has increased, ii) competition in acquiring standalone vet clinics has increased; and iii) potential need to harmonise Petbarn’s instore and online prices,” its analysts told clients in a research note.
In particular, it reckons issues such a high level of borrowings, the nascent threat that Amazon could enter the pet products sector and the lack of clarity surrounding the implementation of some of the flagged cost reductions could slow any turnaround.
As well, Greencross’s vet business may be losing market share.
Late last week, National Veterinary Care said it is enjoying growth of around 3 per cent at its clinics, whereas Greencross has disclosed declines of around 3 per cent.
“This suggests that Greencross’ issues could be company specific and that it may be losing share,” Citi noted. “While Greencross has implemented measures such as enhanced retail cross referral programs and increased focus on wellness program membership to increase clinic visits, we do not expect the impact of these measures to come through until 1H19.”
As a result, Citi argues it is too soon to consider buying Greencross shares. It has a 12-month price target of $4.70 on the shares.