Description

Grey Wolf Animal Health (“WOLF” on TSX-Venure) caught our attention for its recent growth in sales and EBITDA margin, coupled with a reasonable valuation. Sales grew from C$22.6 M in 2022 to C$26 M annualized 3Q23. Meanwhile, Adjusted EBITDA margin has grown from 6.8% in 2020 to 15.4% in 2022. The company recently became profitable.

BACKGROUND: Strong Tailwinds in Pet Healthcare

The pet healthcare industry benefits from strong tailwinds, such as pets being increasingly viewed as members of the family (“humanization” of pets, with our desire to minimize pet suffering), millennials often choosing pets over raising a family, and the rapid increase in personalized medicine now extending to pets (e.g. specialized formulas and dosing like immunotherapy for pet allergies). In Canada, pet sales (pet supplies and food, vet services) are C$13 B, with steady growth of +6.9% CAGR from 2006-present. Historically, pet spending has been recession-proof: pet spending grew steadily before, during and after the Great Recession.

We should remember Heska (HSKA), with a similar focus on pet diagnostics and products, perhaps one of the top-10 U.S. microcap growth stories of the last ten years, growing sales 3x and the stock about 20x (from $6 to $120) from 2013 to its acquisition in 2023.  

MANAGEMENT

In 2015, company was founded by Dr. Ian Sandler. Sander was a co-founder of Ontario Veterinary Group (which grew to 8 clinics before a successful exit in 2014 to VCA). CEO is Angela Chechetto (business and corporate development at Paladin Labs). CFO is Kevin Palmer. VP Operations (Trutina) is Brandon Mair-Wren. Each member of the management team has 15+ years of experience in pharma or animal health. Employees and insiders own 19% of shares. Also, institutions only own 11% of shares (a potential catalyst for the stock would be the increase in institutional shareholding).

PRODUCT PORTFOLIO (25+ products): Pharma and Non-Pharma

GWAH has a Pharmaceutical Portfolio (Health Canada-Approved and Generic Prescriptions, Custom Medications) and Non-Pharma Portfolio (Nutraceuticals, Consumables). Both have strong organic growth. The company now has national sales coverage (12 sales reps for Canada). The company also has its own modern facility/pharmacy for developing and producing custom medications (including sterile and non-sterile products).

The Pharma Portfolio is tilted toward Thyroid and Anesthetics (Pain). An example is +GI, which had sales growth of +80% in the recent 3Q. Entero Aid +GI is a Health Canada-approved product to support a healthy gut and bowel function (and is an alternative to anti-biotics) when a pet has (severe) stomach upset, which is the most common reason for visiting a vet. Sales for this segment were C$3.6 M, with C$1.6 M in gross profit, in the recent 3Q23.

The Nutraceuticals Portfolio is tilted toward GI upset, Behavior (e.g., Situational Anxiety), Joint and Liver. The Consumables Portfolio includes Medical pet shirts, wound care, needles/syringes, and catheters. An example is Medical pet shirts (to prevent scratching while recovering from an injury; an alternative to the “cone of shame” – ha!), which has steady growth, including sales growth of +27% y/y in the recent 3Q. Sales for this segment were C$2.9 M, also with C$1.6 M in gross profit, in the recent 3Q23.

STRONG HISTORY OF ORGANIC GROWTH

Organic growth comes from: 1) Increasing reach into the 3,400 Canadian vet clinics (both increasing the number of vet clinic clients and increasing the order size to those clinics), 2) business development (e.g. in-licensing, or cherry-picking, complementary products from the U.S. and Europe), and 3) product development (i.e., formulating new products or extending products with new formulas).

Product launches seem robust. They include Hide & Treat (2019), +GI Upset (2019), Advanced Wound Care (2020), Ataject/Sedaject (2021), Composure Pro (2022), Fibre Boost +GI (2022), Vertiflex (2022) and HepatiClear (2023). The company now has 25+ products on the market.

There are about 3,400 vet clinics in Canada with C$1.5 B in sales. If the company grows to C$100 M in sales, that would represent less than 1% of the Canadian vet market.

SOLID EXECUTION: INCLUDES ACCRETIVE ACQUISITIONS

Company has completed two accretive acquisitions, VHS Veterinary Healthcare Solutions (VHS) in 2018 and Trutina Pharmacy (for C$22.3 M in September 2021). VHS had 3 sales reps; the company has built that out to 12 sales reps, who now cover all of Canada. Trutina (a compounding pharmacy) roughly doubled the company’s sales and added equine products to the portfolio.

VALUATION TODAY

Basic shares are 31 M (FDS is 35.7 M with warrants expiring in August 2024). The company has bank debt of C$9.5 M (from acquisition of Trutina) and cash of C$8.0 M, for net debt of C$1.5 M. Run-rate sales are C$26 M and EBIT of C$2.2 M. That’s 13.9x EV/EBIT for a growing company.

VALUATION (ROUGH) IN FIVE YEARS

With sales growth double the industry average (7%), the company’s sales should roughly double in five years to C$50+ M. With expansion in Adjusted EBITDA margin to 20% from 15.4%, that implies Adjusted EBITDA of C$10+ M. A multiple of 8-10x puts the stock at C$80-100 M, roughly a triple from here.  

Catalyst

Continued sales growth at or above pet industry growth rate (7%)

Earnings growth with limited/no dilution

Institutional funds start buying shares