EBOS Group Limited

Company Overview: EBOS Group Limited (NZX: EBO) is a marketer, wholesaler and distributor of healthcare, medical and pharmaceutical products, and is also involved in marketing and distribution of animal care products. Its Healthcare segment incorporates the sale of healthcare products in a range of sectors, retail healthcare, own brands, logistics, and wholesale activities, while its Animal care segment incorporates the sale of animal care products in a range of sectors, own brands, retail and wholesale activities. Its businesses include Institutional Healthcare, Community Pharmacy, Animal Care, and Contract Logistics. Community Pharmacy includes Symbion, Endeavour Consumer Health, ProPharma, DoseAid as well as Intellipharm. Institutional Healthcare includes Onelink, Clinect, Zest and EBOS Healthcare. Contract Logistics comprises Symbion Clinical Trials, Symbion Contract Logistics and Healthcare Logistics. Animal Care includes Animates, Vitapet, Masterpet, and Lyppard.

EBO Details

Investment Summary:

• Topline and bottom line CAGR over FY15-19 reported at ~5.25% and ~8.71%, respectively.
• EBOS is entering the medical device sector, which is estimated to be of A$8 billion in the Australian and New Zealand market, and this could prove to be a big growth catalyst.
• The company has not experienced any substantial impact of COVID-19 on its earnings.
• RoE is better than the industry median, implying decent returns for the shareholders.
• Good rapport with the Minister and the Department underpinned by working together pro-actively to ensure the CSO model continues to deliver equitable access to medicines for all Australians.
• EV/EBITDA Multiple based illustrative relative valuation approach is indicating a decent upside (in % terms).
• EBO’s business activities are exposed to foreign currency risk arising primarily from the procurement of goods denominated in foreign currencies.

Healthcare & Pharmaceutical Sector to Boost Return of Global Investors: EBOS Group Limited (NZX: EBO) is a leading marketer and distributor of healthcare products and animal care brands and has a market capitalization of ~$3.55 billion as on August 10, 2020.

Looking at the past performance over FY15 to FY19, top line and the bottom line of the company witnessed a compounded annual growth rate (CAGR) of ~5.25% and ~8.71%, respectively. The company’s total revenue increased from A$5,648.2 million in FY15 to A$6,930.4 million in FY19, and its net income grew from $98.6 million in FY15 to $137.7 million in FY19.

In the first half of FY20, the company’s Australian wholesale business demonstrated its leading competitive position with a significant increase in revenues and profit, reigniting the growth of TerryWhite Chemmart (TWC), one of Australia's leading community pharmacy networks. TWC network’s sales growth stood at 5.7% on the prior period, and there was addition of 16 new stores to the network in the period.

Group revenue increased by 25.2% to $4.4 billion in the period, reflecting the strength of its portfolio of businesses especially in Pharmacy Wholesale, along with strong performances from Healthcare Logistics, TerryWhite Chemmart and Institutional Healthcare.

The acquisition of LMT/NS for $34 million indicates EBOS’ entry into the A$8 billion Australian and New Zealand medical device sector creating a new platform of growth for the Group. It expects its FY20 earnings guidance to rise significantly.

Historical Performance (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 32.17% of the total shareholding. Sybos Holdings Pte. Ltd. and Fidelity Management & Research Company are holding maximum interests in the company at 18.74% and 3.36%, respectively, as provided in the table below:

Top 10 Shareholders (Source: Refinitiv (Thomson Reuters))

A Quick Look at Key Metrics: The company recorded an improvement in EBITDA margin to 3.8% in H1FY20 as against 3.7% in previous corresponding period. Its net margin in H1FY20 stood at 1.9%, in-line to the previous corresponding period.

Key Metrics (Source: Refinitiv (Thomson Reuters))

Robust Operating Cash Flow for First Half FY20: The group reported an increase in H1FY20 revenue by 25.2%, primarily due to growth in Contract Logistics, Institutional Healthcare, Pharmacy Wholesale, and TerryWhite Chemmart. Underlying EBITDA, NPAT and EPS increased by 13.4%, 15.8% and 9.1%, respectively. Healthcare revenue improved by 26.1% and its underlying EBITDA grew by 16.3%, driven by the performances of its Contract Logistics businesses, Institutional Healthcare, TWC and Community Pharmacy. Due to the continued excellent performance of its branded products portfolio and higher wholesale volumes, revenue growth in animal care segment stood at 9.5% or $18.3 million.

Due to the significant increase in earnings and continued working capital management, statutory Operating Cash Flow stood at $74.2 million, an increase of $34.0 million. Net Debt as on December 31, 2019, stood at $392 million.

H1FY20 Income Statement (Source: Company Reports)

A Look at Recent Updates: In June’20, following the recent execution of the 7th Community Pharmacy Agreement, the group announced about the achievement of mutually beneficial outcomes with the Federal Government.

To continue to support medicine supply through the wholesaler network over the next five years, the new arrangements assist CSO wholesale distributors with an additional $92 million investment into the CSO funding pool, along with introduction of a restructured wholesale mark-up for PBS medicines.

What to Expect: EBO’s cash generation is expected to drive further investment and pay dividends of not less than 60% of Net Profit After Tax. Its strategic focus is on assets with Return on Capital Employed (ROCE) of not less than 15%. This can be supported by the fact that the company has a strategic focus on strengthening its leading market positions in healthcare and animal care businesses along with maximizing opportunities across the diverse range of businesses. Under capital expenditure, the company is expected to maintain as well as extend its market leadership through regular investment in its lowest-cost-per-unit distribution network, allowing it to deliver optimal customer outcomes.

Key Risks: EBO is exposed to foreign currency risk arising primarily from the procurement of goods denominated in foreign currencies such as British pound, Euro, Thai Baht, US dollar, and Australian dollars. It is also exposed to regulatory risk.

Key Valuation Metrics (Source: Refinitiv (Thomson Reuters))

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source:  Refinitiv (Thomson Reuters))

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands with upper band suggesting overbought status while lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack.

The stock on the first day of trading session for the on-going week, has given close above the previous week close in a low volatile market, forming ‘Inverted Hammer’ candle signaling potential bullish reversal. Technical indicator RSI with around 45 reading suggests gaining of bullish momentum for the stock.

Going forward, the stock may have resistance around $23.30 as has been provided by the upper Bollinger band while support could be around 38.2% retracement level of $21.15.

Stock Recommendation: The company is a diverse group, operating across sectors and geographies and it also operates across the value chain, which has supported stability in its earnings growth and cash flow generation. Its strong balance sheet is supported by good liquidity and a Net Debt: EBITDA ratio of 1.41x. Moreover, the acquisition of LMT/NS for $34 million signals the company’s entry into the A$8 billion Australian and New Zealand medical device sector creating a new platform of growth for the Group. The company has not experienced any significant impact of COVID-19 and it is well-prepared to respond to any challenges that arise as the situation unfolds.

Considering the aforesaid facts, recent updates and H1FY20 results, we have valued the stock using a relative valuation method i.e. EV/EBITDA Multiple Based Relative Valuation (on an illustrative basis) and we have arrived at a target price of higher single-digit growth (in % terms).

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$21.820, up by 0.18% on August 10, 2020.

EBO Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

Disclaimer

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