Tim Boreham: Australian pet care sector is nothing to sniff at

With Woolworths and Bunnings being unleashed on Australia’s pet care market, Tim Boreham takes investors on a walk through a lucrative sector.

Pet care can mean big bickies for investors, though this pup prefers them small. Picture: iStock

When both Woolworths and the Wesfarmers-owned Bunnings get on the scent of a pedigree blockbuster growth opportunity, you know that it’s got legs (in this case, four of them).

Both retailers have announced forays into the multibillion-dollar pet care sector, which was bolstered not just by the pandemic panic puppy purchasing push (say that three times quickly) but the long-term demographic trend to one-person households.

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Animal Medicines Australia estimates the Australian pet care market at $30.3 billion, with the average household spending $3237 a year on a dog and $2074 on a cat (sorry, moggies – you are second fiddle).

Woolworths (ASX:WOW) is finalising the $586 million purchase of 55 per cent of Petstock, the second -biggest pet care “category killer”.

Like a kelpie in the back of the ute, Petstock founders Shane and David Young are hanging on for the ride with the remaining stake.

Petstock last year acquired both Best Friends and MyPet, so there’s been plenty of consolidation in the kennels.

Meanwhile, in its biggest category expansion in two decades, Bunnings – as we mentioned, owned by Wesfarmers (ASX:WES) – is expanding its pet care range to as many as 1000 items. Still, for both retail giants it’s still Chum(p) change.

Pure-play exposures have been more limited since TPG acquired vet chain and Petbarn owner Greencross – founded by Glen Richards of Shark Tank fame – for $675 million in 2014.

(TPG, by the way has just bid $1.8 billion for deathcare operator InvoCare, which includes pet cemeteries in its repertoire).

Rival listed vet chain National Veterinary Care was snaffled up by another private equiteer in late 2019, for $250 million.

That leaves the $100 million market cap Apiam Animal Health (ASX:AHX), which operates 79 vet clinics in both rural and city areas.

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Founded in Bendigo by CEO Dr Chris Richards – and no relation to Glen – Apiam’s focus is on production animals: the pig and feedlot sectors and supplying everything from vaccines, food supplements and porcine semen from its genetic labs.

But its companion animal business has grown more strongly.

After all, profit margins are much better for treating a doting owner’s chow chow than a cranky farmer’s irate sow.

Apiam also has a joint venture with Petstock, with Apiam’s vet clinics co-located in Petstock stores.

Intriguingly, Petstock also owns 16 per cent of Apiam – a handy stake should the industry shake-out continue apace. Apiam last month reported revenue of $93.7 million for the December (first) half, with net profit climbing 15 per cent to $3.7 million.

Testament to the sector’s recession-resistant qualities, like-for-like revenue grew by double digits in January. The furry equivalent to eBay or Amazon, Mad Paws (ASX:MPA), facilitates third-party services such as dog walking, pet sitting and grooming.

But most revenue derives from its own products including the self-explanatory Dinner Bowl, Waggly (subscription toys and treats) and the online Pet Chemist.

Mad Paws acquired Pet Chemist acquired in January last year for up to $25 million, followed by Waggly Club in October for $3.45 million.

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MPA reported a 272 per cent uptick in December half revenue to $12 million and an operating loss of $2.58 million, a 39 per cent improvement.

The company is on track for full-year revenue of $30 million, up 75 per cent and expects to post an underlying profit by mid 2023.

Trading at two-year lows, Apiam offers paws for thought for investors who refuse to bow (wow wow) to market sentiment.

Apiam has $62 million of debt up for renewal in October but is confident the bank, like a well-trained Rover, will roll over.

We’ve run out of doggone puns so will leave it at that.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

Find more Tim Boreham wisdom at stockhead.com.au

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