PETHEALTH INC PTHLF

Tremendous Value at Pethealth; Potential Crystallization

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Current Price: $1.83 Target Price: $2.50 Rating: Strong Buy
Analyst: Fred Westra [e-mail] [phone]

Tremendous Value at Pethealth; Potential Crystallization through Strategic Review Process

EVENT

We are adjusting our forecast based on Q2 financial results as well as providing an update following the announcement of the potential sale of the Company on August 19th. While there can be no assurance that PTZ will be sold, we provide an analysis on what the break-up value of PTZ could be based on intrinsic value of business subsidiaries compared to pure-play market comparables.

HIGHLIGHTS

· Break-up value: We estimate the potential break-up value of Pethealth by attributing a value to 1) the insurance business, 2) the Microchip and Database operations and 3) the online adoption web property and the eCommerce business.

· Insurance Operations: We estimate that this business could be worth ~$60-$80m or $1.73-$2.27 per share based on a comparative analysis to Trupanion (NYSE: TRUP).

· Microchip and Database: this business could be worth ~$35m or $1.00 per share based on a comparative analysis to Animalcare PLC (LON: ANCR).

· Petango and eCommerce: is estimated near $20m or $0.57 per share based on precedent transactions of Petfinder.com by first, Discovery Communications (NASDAQ: DISCA), and then by Nestle Purina, and of Pet360 by PetSmart (NASDAQ: PETM).

· All-in: Using our base case, most buyers could value PTZ at $3.34 per share for all three components with upside to $4.00.

· Synergies not included: In addition, these valuations do not take into account any synergies such as taking-out public company costs, and the massive distribution capabilities of the shelter channel through PetPoint, which we do not value.

OUTLOOK

Based on Q2 results, we are adjusting our revenues, Adj. EBITDA, and Adj. EPS estimates for 2014 (assuming Pethealth is not sold) to $52.2m, $5.8m and $0.02. In 2015, we are forecasting revenues to increase to $59.0m, EBITDA to rise to $8.1m and EPS to grow to $0.07. The increase is mostly attributable to continued growth in insurance operations with improving margins on overall B2B.

VALUATION

At this time, we maintain our target price by applying Pethealth’s 2015 EBITDA to a 55% blend of insurance brokers that trade at 9.6x, 40% pet-related peers trading at 10.6x and 5% online media, advertising and data publishing companies trading at 10.2x. Overall, the blended EV/EBITDA multiple equates to 10.0x. We are therefore maintaining our STRONG BUY recommendation and 12-18 month target price of $2.50, equating to a 37% total return.