Grandvision is a Dutch company, and one of the world’s leaders in eye care as it owns and operates a huge network of prescription glass and contact lens stores all around the world. The company IPO’ed in 2015 and as it has now released the financial results for 2016 (as well as the 2017 outlook), Grandvision deserves our attention.




2016 was a good year with 406 new stores

Grandvision’s total revenue increased by approximately 3.5% to 3.3B EUR, but the increase would actually have been 6.5% if one would apply the same currency exchange rate in both years. It’s really interesting to note that even though Grandvision is in an acquisition mode, the majority of the constant FX revenue growth was caused by organic growth, which is a good indication the company has a very strong position on the markets it’s actively working in.


Source: press release

The adjusted EBITDA increased to 537M EUR (+6.7%), and once again the organic growth took care of the entire EBITDA growth. The organic EBITDA increased by 7.3%, and the EBITDA from the acquisitions actually had a negative impact on the total result.

The company’s gross profit increased from 2.33B EUR to 2.42B EUR, and despite the higher operating expenses (which are pretty normal given Grandvision is a fast-growing company), the operating income increased by roughly 1.5% to 358M EUR. That’s perhaps slightly disappointing, but we would expect a part of these G&A expenses to be one-time events related to the acquisition and integration of the new subsidiaries.

Despite having a net debt of in excess of 700M EUR, the net financing costs are really impressive with a total cash outflow of just 10M EUR, whilst the total gross interest expense is just 19M EUR (which means the cost of debt is less than 3%). Due to the higher operating income and a lower tax bill, the net income attributable to the Grandvision shareholders increased to 231M EUR (although a part of the higher net income was caused by tax-related one-off effects, so be prepared to see the tax bill increasing to in excess of 110M EUR in the current financial year.

Source: press release

With an EPS of 0.92 EUR, Grandvision is trading at a P/E ratio of 25, and that’s quite high. However, with an operating cash flow of 431M EUR, a total capex bill of 176M EUR and a debt-related total payment (interest + swaps) of 18M EUR, the company’s free cash flow was 237M EUR, or approximately 0.94 EUR/share. Considering this also includes the free cash flow attributable to the non-controlling interests, the Grandvision FCF will be a tad lower, and we would expect a 98% conversion rate from net profit to free cash flow, and an adjusted FCF/share of 0.90 EUR for Grandvision for a free cash flow yield of almost 4%.

Is the company worth its current share price?

The company is trading on Euronext Amsterdam with GVNV as its ticker symbol. The current market capitalization is approximately 5.9B EUR, and we were obviously wondering if this is a fair valuation for a growth-oriented company.

Based on both the PE ratio and the free cash flow yield which is less than 5%, you’d be inclined to say ‘no, Grandvision is overvalued’. But then again, it’s a growth company, and the market tends to price in a part of the future growth. And as Grandvision is able to increase its revenue through organic growth and acquisitions, we do agree with the market’s assessment Grandvision deserves a premium.

Source: company presentation

The proposed dividend will cost the company approximately 80M EUR, which means the remainder of the 237M EUR free cash flow (157M EUR) will be used to deleverage the company. This also increases Grandvision’s firepower to pursue more acquisitions.

The company wants to keep its net debt/EBITDA ratio below 2. So assuming an adjusted EBITDA of 550M EUR this year (+2%), Grandvision’s board will keep the maximal net debt limited to 1.1B EUR.

As of at the end of last year, the net debt was approximately 750M EUR, and after assuming an adjusted free cash flow of 160M this year, the net debt could decrease to 590M EUR. This means that throughout this year, Grandvision should be able to pursue acquisitions of up to 500-600M EUR to expand its portfolio of stores. We obviously aren’t saying anything is gonna happen, but just know that Grandvision has the financial capacity to take advantage of opportunities.

Investment thesis

Grandvision generates strong cash flows and healthy operating margins, and we were positively surprised to see the strong organic revenue growth. Grandvision will very likely continue to grow and that’s why the market is allowing Grandvision to trade at a premium. At a free cash flow yield of 4%, the company isn’t cheap, but it’s a call option on the future, and the continuously increasing need for people to wear glasses.

The Euronext Amsterdam listing also has some option chains available, so perhaps it could also be a good idea for a more sophisticated investor to investigate the possibility to write put options to reduce the average purchase price and to pocket the option premium whilst you’re waiting for the share price to come down to the desired level.

Disclosure: the author has no position in Grandvision but could write some out of the money put options.

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