Company Overview: EBOS Group Limited (ASX: EBO) is a health care and animal care products group with many top brands. The company serves thousands of customers across Australasia and remains committed to build an enhanced community by providing high-quality products. It has greater than 3,600 employees across 57 locations in Australasia. It remains focused to positively impact millions of lives across the region on a daily basis.


EBO Details 

Robust Strategic Investment & Higher Segmental Revenues are Key Catalysts: 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 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 boost its ~7,599 potential stakeholders.
 
In FY19, the company reported revenues of around $6.9 billion. EBOS Group continues to strengthen its capabilities across the entire supply chain, through targeted acquisitions and key investments in technology, people, and infrastructure. These investments aid the company to diversify its business and keep it well equipped to ensure a better future, thereby providing better support to the healthcare and animal care markets across Australia and New Zealand.
 
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. EBOS Group also inked the Chemist Warehouse Group (CWG) pharmaceutical contract, which began on 1 July 2019.

Going forward, EBOS Group Limited remains confident about its new facilities, which will provide the company with enhanced capabilities to better serve the customers, along with 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. The company’s execution program to open new Consumer Products distribution and manufacturing facilities in Auckland remains a key positive, going forward. The company reported robust 1HFY20 results and remains confident of a substantial increase in earnings in FY20.

 
Over a period of 4 years starting from 2015 to 2019, the company has reported underlying EBITDA CAGR of 9.4% with EBITDA in 2015 and 2019, amounting to $182.3 million and $261.6 million, respectively. Also, the company witnessed a CAGR of 10.1% in its underlying NPAT, over a period of 4 years (2015-2019). The company has a history of delivering sustained shareholder returns. EBO declared a final dividend of NZ 71.5 cents per share in FY19, up 4.4% year over year.
 

EBITDA & NPAT Trend (Source: Company Reports)
 
1HFY20 Results for the Period Ended 31 December 2019: During the half, the company’s total revenues and underlying net profit rose by 25.2% and 15.8%, respectively, year over year. Underlying EBITDA rose 13.4% year over year to $149 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 35.4% 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 52.2 cents per share, up 9.1% year over year.
 

FY19 Results (Source: Company Reports)
 
Segmental Highlights: During the period, the company’s healthcare segment witnessed a revenue growth of 26.1% year over year, which came in at $4.2 billion. The increase was aided by higher revenues from Australian business, which witnessed a growth of 30.9%, driven by robust performance of its Pharmacy Wholesale, Institutional Healthcare, TWC, and Contract Logistics businesses. Revenues from New Zealand business increased by 9.9%. Animal Care segment revenue increased 9.5% year over year and came in at $210.6 million, on the back of robust performance of its branded product portfolio and higher wholesale volumes.
 

Segmental Highlight (Source: Company Reports)
 
Balance Sheet Position: At the end of 1HFY20, the company’s cash balance stood at $274.4 million.  At the end of 31 December 2019, the company had a net debt of $392.2 million, with a net debt to EBITDA ratio of 1.41x. The company’s current gearing continues to provide around $300 million – $350 million headroom for future acquisitions. As on 31 December 2019, gross drawn debt stood at $666 million. The company’s key focus involves its working capital management, thereby maintaining its industry leading cash conversion cycle of 16 days. Return on Capital Employed for the period stood at 15.9%, depicting robust earnings growth.
 

Net Debt Movement (Source: Thomson Reuters)
 
Cash Flow Position: Operating cash inflow in 1HFY20 came in at $74.2 million, as compared to $40.3 million in 1HFY19. Capital expenditure for the period came in at $13.7 million, which mainly consisted of expenditure on the new Consumer Products distribution in Auckland and other smaller projects. Free cash flow stood at $60.5 million as compared to $23.3 million reported in the prior corresponding period.
 

Cash Flow Details (Source: Company Reports)

COVID-19 Update: The company recently provided a business update, which highlighted the continuous strength of its liquidity position along with a robust balance sheet. The company took necessary actions to restraint the impact of COVID-19 crisis. The company stated that it continued to witness positive momentum across its businesses through to the closure of third quarter ended 31 March 2020. The company produced solid revenue growth from its healthcare and animal care segments, supported by the rising demand. The company’s businesses including wholesale, distribution and retail healthcare activities are performing a vital role in safeguarding stable and continuous supply of healthcare, medical and pharma goods, as they are classified as essential services. Apart from this, EBO is taking necessary measures to ensure health & safety of its employees & clients, during this crisis. The company has also set up a Pandemic Response Team that meets regularly to assess issues and take any measures required.
 
Recent Update: On 13 May 2020, the company issued 6437 fully paid ordinary shares for a consideration of NZ$22.23 per security, under its Employee Share Plan.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 44.44% of the total shareholding. 
 
 
Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: In 1HFY20, the company had an EBITDA margin of 3.8%, which was slightly above 1HFY19 margin of 3.7%, representing decent fundamentals. ROE in 1HFY20 stood at 6.5%, higher than the 1HFY19 ROE of 6.2%.


Key Metrics (Source: Refinitiv, Thomson Reuters)

What to Expect: With rising uncertainty due to COVID-19 outbreak, the outlook for consumer demand in the current environment is evolving. The company is closely monitoring the situation and is taking necessary steps for the safety and well-being of staff and employees. The Group has a robust balance sheet and liquidity position and is well-positioned to meet the ongoing business needs and growth strategy, going forward. Further, the cash available with the company will allow it to continuously strengthen its Healthcare and Animal Care segments during these unprecedented market conditions and capitalise on future opportunities. The company’s balanced approach with respect to growth coupled with the expansion of its existing portfolio, reflects its progress towards sustainable future growth.
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: P/S Market-Multiple Valuation Approach (Illustrative)
 

P/S Market-Multiple Valuation Approach (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters
 
Stock Recommendation: The stock of the company corrected by 11.23% in the past one month. Notably, the company’s diversified presence across various sectors and geographies is a key catalyst. At the CMP of $20.20, the stock of the company is trading at a P/E multiple 21.18x with a dividend yield of 3.09%. The company has a market capitalisation of ~$3.32 billion and ~162.86 million outstanding shares. Currently, the stock is trading below the average of its 52-week high and low of $24.5 and $18.8, respectively, proffering an opportunity for share accumulation. Considering the robust revenues from its Healthcare and Animal Care segments, strong cash position, and current trading level, we have valued the stock using a Price-to-Sales based market multiple valuation approach, and arrived at a target price of low double-digit growth (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $20.20, (down 0.98% on 20 May 2020). 
 
 
EBO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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