This pet insurer and medical care provider has the largest market share in Japan
Tokyo-listed Anicom Holdings is the largest pet insurance company in Japan. Besides its main business of providing non-life pet insurance in its home market, its other businesses include animal hospital support operations, clinical research on animal medical care and pet-related internet services. Anicom currently trades at JPY598 ($5.35) per share, giving it a market capitalisation of JPY49 billion.
The Edge Singapore did a valuation of pet-themed stocks recently (Issue 1122, Jan 29) and we have selected the highest-scoring pet-themed stock for our 2024 portfolio. The scoring table includes various financial indicators and metrics, the first of which is historical performance. The second metric analyses its price growth versus growth in weighted value over multiple periods. The weighted value growth comprises revenue, net profits, OCF (operating cash flow) and FCF (free cash flow) in order of increasing weights. A company that has a price growth less than its value growth is deemed undervalued and the converse applies. The third metric studies the profitability of the company, which focuses on margins, while the fourth metric is yields and relative valuation to determine its financial attractiveness. The fifth metric examines the financial safety of a company and the last metric looks at analyst sentiment on the stock. Overall, we think these metrics are a holistic reflection of a pet company’s fundamentals.
Chart 1 shows the price-to-growth valuation of the company and it clearly shows that the company is undervalued. Chart 2 shows the relative valuation of Anicom compared to both global and regional peers, and the company appears to be attractive as it trades at a discount for most of its forward valuation ratios. The company’s financial performance is consistent as well, reflected by its positive OCF and FCF over the past 10 years.
See also: F1 stocks: Who’s on pole?
Qualitatively, Anicom’s business has multiple features that give it a greater competitive advantage. Firstly, its business covers a wide range of animals, apart from the usual cats and dogs. People are more likely to purchase pets if they are covered by insurance as opposed to not having any protection for their furry or non-furry animal pal. The company’s insurance settlement system is also comparatively better than alternative options available as its over-the-counter (OTC) insurance settlement system provides greater convenience and has low administrative costs compared to the traditional claim method. Its policies are further enhanced through its broad partnership with hospitals that accept its pet insurance.
Anicom’s insurance targets two channels. One is the newborn channel for baby animals that are mainly sold through pet shops and breeders, especially those about to join new families. The other is the general channel via OTC sales through agents or direct sales by the company. The market for this channel is huge and a great business opportunity and addressable market for Anicom. Chart 3 illustrates the domestic pet insurance market size and penetration rate, which has been growing at a steady pace and is projected to grow at a healthy rate. Anicom’s financial moat is also very strong which implies greater margins, reflected by its largest share in the Japanese market for the pet insurance market over the past 12 years.
See also: Germany refutes report that it will stop additional aid to Ukraine
Separately, Anicom’s unique strength comes from its capacity to create value through data analytics, where the company recently discovered that gut bacteria can make a difference to the health status of pets and that it is possible to make pets healthier by improving their gut microbiomes. With this discovery, Anicom aims to accelerate the efforts to prevent pet diseases and will advance the food business further by harnessing the data accumulated through the pet insurance business as well as the results of gut microbiota measurement, genetic testing and other services. This will be further augmented by harnessing the expertise of vets and through support for pet shops and breeders by Anicom.
The company has four “buy” calls, with no “hold” or “sell” calls, with an average target price of more than 36.5% above its current trading price. Based on our in-house valuations, we believe that the intrinsic value of the company is at least over 45% above its current trading price. Anicom is a great company to buy for investors seeking lower-risk growth companies that have sound fundamentals.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
