EBOS Group Limited

Company Overview: EBOS Group Limited (ASX: EBO) is a health care and animal care products group with many top brands. The company remains on track to strengthen its leadership position across its business segments and continues to execute a strategic investment plan designed to fortify its core business. In doing so, the company can leverage on new opportunities and enhance its capabilities to augment the potential stakeholders. Notably, the company is a pharmaceutical wholesaler to more than 3500 pharmacies in Australia & New Zealand.

EBO Rides on Strategic Investments & Buyout Synergies: EBOS Group Limited (ASX: EBO) is engaged in the marketing, and distribution of medical, healthcare & pharma goods in Australia, and offers renounced consumer products & animal care brands. The company remains on track to maintain a robust momentum through its 1H20 financial year, recording double-digit growth in its bottom line, year over year in all its business segments and further enhancing its shareholder’s value. Despite the substantial challenges faced by the company in 2020, EBO has remained committed to drive organic growth in its leading Healthcare and Animal Care businesses across New Zealand and Australia.  The company remains on track to strengthen its leadership position across its business segments and continues to execute a strategic investment plan designed to fortify its core business as well as increasing dividends to its shareholders.

In 2019 and 2020, EBO wrapped up numerous planned acquisitions. The company also transitioned into two new distribution facilities in Brisbane and Sydney. On 1 July 2019, EBO inked a successful contract with Chemist Warehouse Group (CWG) pharmaceutical. The company’s Retail Pharmacy division was predominantly active throughout 2019 as it moved to 100% ownership of the Terry White Group (TWG) and retained its wholesale contract with Blooms. TWC received 22 new pharmacies in 1HFY21, depicting the largest six months rise of network stores on record. This fortifying TWC’s position as Australia’s biggest health-advice oriented community pharmacy network. In 1HFY21, TWC network sales increased by 5.8% year over year, owing to new store growth, continuous increases in media spend and enhanced promotional and category programs. In October 2020, the company bought Cryomed for a purchase consideration of $14 million. The acquisition depicts the company’s second procurement in the medical devices sector and remains on track to pursue further opportunities via acquisitions, in order to fortify its foothold in the sector.

Over a period of 4 years, starting from 1HFY16 to 1HFY21, the company has reported underlying EBIT CAGR of ~9.0% with underlying EBIT in 1HFY16 and 1HFY21, amounting to $104.6 million and $147.8 million, respectively. Also, the company witnessed a CAGR of 9.1% in its underlying NPAT, over a period of 4 years (1HFY16 and 1HFY21). The company has a history of delivering sustained shareholder returns. EBO declared an interim dividend of NZ 42.5 cents per share in 1HFY21, up 13.3% year over year. As per the company announcement on 17^th February 2021, EBO will be distributing a dividend amount of NZD 0.44375 to its shareholders, with an ex-date of 4 March 2021 and a payment date of 18 March 2021.

EBIT & NPAT Trend (Source: Company Reports)

1HFY21 Results for the Period Ended 31 December 2020: During the half, the company’s total revenues and underlying net profit rose by 6.3% and 14.2%, respectively, year over year. Underlying EBITDA rose 9.3% year over year to $184.1 million. The increase in revenues depicts the company’s portfolio strength with a substantial uplift in Pharmacy Wholesale and strong performances from TerryWhite Chemmart, Institutional Healthcare and Healthcare Logistics. The company witnessed a robust performance from its Community Pharmacy business, with revenues up 4.8% year over year. During the period, the company witnessed continuous market share gains across Australia and New Zealand in its Healthcare Logistics business. Underlying EPS for the period stood at 57.8 cents per share, up 12.7% year over year.

During the period, the company’s healthcare segment witnessed a revenue growth of 5.9% year over year, which came in at $4.4 billion. The increase was aided by higher revenues from Australian business, which witnessed a growth of 5.5%, driven by robust performance of its Pharmacy Wholesale, Institutional Healthcare, TWC, and Contract Logistics businesses. Revenues from New Zealand business increased by 7.4%. Animal Care segment revenue increased 15.7% year over year and came in at $243.8 million, on the back of robust performance of its branded product portfolio and higher wholesale volumes.

Segmental Highlights (Source: Company Reports) 

Top 10 Shareholders: The top 10 shareholders together form around 35.17% of the total shareholdings, while the Top 4 constitutes the maximum holding. Sybos Holdings Pte. Ltd. is the entity holding maximum shares in the company at 18.6%. Accident Compensation Corporation is the second-largest shareholder, with a holding of 3.67%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Key Metrics & Decent Liquidity Position: At the end of 1HFY21, the company’s cash balance stood at A$294.1 million.  At the end of 31 December 2020, the company had total debt of ~$829.4 million, with a net debt to EBITDA ratio of 1.00x. The company’s current gearing continues to provide headroom for future investments and acquisitions. Return on Capital Employed for the period stood at 17.5%, depicting decent earnings growth. Operating cash inflow in 1HFY21 came in at $98.7 million, as compared to $74.22 million in 1HFY20. Capital expenditure for the period came in at $10.1 million, which mainly consisted of expenditure on multiple operating sites and IT projects. In 1HFY21, the company had an EBITDA margin of 3.9%, which was slightly above 1HFY20 margin of 3.8%, representing decent fundamentals. ROE in 1HFY21 stood at 6.9%, higher than the 1HFY20 ROE of 6.5%. 

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: The company is exposed to foreign currency risk and interest rate risk. Further, lower investment in generating working capital requirement exposes the company to liquidity risk. The company also increased investment in R&D, to achieve its growth plan, which might weigh on margins, going forward. Also, stiff competition from peers remains a potential concern. 

Outlook: Going forward, EBO remains confident about its new facilities, which will provide the company with enhanced capabilities, room for growth, efficiency, and productivity. It will, therefore, position itself well to capture new prospects and adapt to the ever-changing needs of local and global healthcare and animal care markets.  Apart from this, EBO is taking necessary measures to ensure health & safety of its employees & clients, during the COVID-19 led crisis. With enhanced capabilities, the company is likely to provide long-term growth opportunities to both its existing and new Original Equipment Manufacturers in the Australian and New Zealand markets. The company’s balanced approach with respect to growth coupled with the expansion of its existing portfolio, reflects its progress towards sustainable future growth.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Currently, the stock is trading above the average of its 52-week’s high and low level of $29.26 and $18.8, respectively. The stock of the company went up by ~11% in the past three months. On a technical analysis front, the stock has a support level of ~$25.65 and a resistance level of ~$28.36. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight discount as compared to its peer median, considering an increased investment in R&D, interaction risk, stiff competition from peers, and foreign currency fluctuation risk. For the purpose, we have taken the peer group - Cochlear Ltd (ASX: COH), Ansell Ltd (ASX: ANN), to name a few. Considering strong financial performance, augmented demand for its animal care and healthcare products, decent liquidity position, valuation and encouraging long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $26.69, up by ~3.369% as on 3 March 2021.

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

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