Woolworths: A new addition to the family

Author name:: By Alex Lu
Job title:: Analyst
Date posted:: 16 December 2022, 8:00 AM
Sectors Covered:: Industrials

Woolworths (ASX:WOW) has agreed to acquire 55% of Petspiration Group for $586m.
Petspiration is the owner and operator of PETstock, which has a network of 276 stores, established eCommerce platforms, 2.4m members on its loyalty program, and own brands including Caribu and Glow.
The transaction implies an EV/EBITDA (LTM Sep-22) multiple of ~11x, which looks full in our view, compared to the Greencross acquisition in 2019 at ~10x (in a lower interest rate environment). Other specialist retailers such as JBH (5.2x), SUL (5.0x) and BBN (7.8x) are currently trading at much lower multiples, even if we apply an acquisition premium.
Despite the deal multiple, if WOW can achieve its targeted mid-teens IRR by leveraging its expertise in supply chain, digital and data analytics, and store network development, then we think the deal looks reasonable.
We make no changes to earnings forecasts given the deal remains subject to closing conditions including regulatory approvals. However, we estimate Petspiration (55% interest) will be ~2% accretive to FY24F underlying EPS.
Retain Hold rating and (login to view) target price on WOW.

Moving further into the pets sector

The Australian pets industry is estimated to be worth ~$10bn with a forecast average growth rate of 5.6% pa between 2019-2026. Approximately 70% of Australian households have at least one pet and Australians spend 28% more on their pets than in the US.

Petspiration is the owner and operator of PETstock, which has a network of 276 stores, established eCommerce platforms, 2.4m members on its loyalty program, and own brands including Caribu and Glow.

Petspiration is the #2 specialty pet retailer in Australia and NZ. According to IBISWorld, Petspiration has ~21% market share behind the #1 player, Greencross (Petbarn and City Farmers), with ~26% market share.

For the 12 months to Sep-22, Petspiration generated revenue of $979m and EBITDA of $158m. Its EBITDA margin of 16.1% is almost double WOW’s FY22 margin of 8.3%.

Acquisition multiple looks full

The deal values Petspiration (100% basis) at ~$1.7bn (including ~$670m in net debt and leases), which implies an EV/EBITDA (LTM Sep-22) multiple of ~11x.

The multiple looks full in our view compared to the Greencross acquisition in 2019 at ~10x (in a lower interest rate environment). Other specialist retailers such as JBH (5.2x), SUL (5.0x) and BBN (7.8x) are currently trading at much lower multiples, even if we apply an acquisition premium.

WOW management believes growth prospects for Petspiration are strong with WOW able to support the business through areas such as digital and eCommerce, supply chain, retail media, format and network development, and advanced analytics. This should deliver ongoing sales growth and margin expansion.

The purchase will be funded from the recent sale of WOW’s 5.5% interest in EDV, which raised ~$636m.

The deal remains subject to customary closing conditions, including ACCC and NZCC approvals, with completion expected in mid-CY23.

Investment view

We think WOW’s intention to increase its exposure to the pets industry makes sense given the sector’s solid growth outlook and will complement WOW’s existing in-store and online (PetCulture) offerings.

Despite the multiple paid for Petspiration, we think if WOW can achieve its targeted mid-teens IRR, then the deal looks reasonable. The key will hence be execution.

Risks

Upside risks include faster-than-expected Australian Food sales growth, lower costs and higher margins.

Downside risks include increased pricing intensity, more competitors entering the supermarket sector and a slowdown in sales momentum. Staff shortages, supply chain constraints and weather are also risks.

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