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 its ~7,599 potential stakeholders. Notably, the company is a pharmaceutical wholesaler to approximately more than 3500 pharmacies in Australia & New Zealand.
 

EBO Details
 

 
EBO Rides on Acquisition Synergies & Higher Segmental Revenues: 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 continues to strengthen its foothold 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 delivered robust results in 2019 and positioned itself well to enter 2020 with flying colours. The result reflects the company’s devotion to the core business strategy to enhance shareholder’s value over time. Notably, In FY19, EBO reported revenues of around $6.9 billion.
 
In 2019, the company completed several planned acquisitions, transitioned into two new distribution facilities in Brisbane and Sydney and successfully inked the Chemist Warehouse Group (CWG) pharmaceutical contract. 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.  In a recent update, the company also stated that it has achieved a jointly beneficial outcome with the Federal Government following the recent implementation of the 7th Community Pharmacy Agreement.
 
Looking ahead, the company 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.
 
In a span of 4 years beginning 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. Markedly, the company increased its interim dividend from NZ 26 cents per share in 1HFY16, to NZ 37.5 cents per share in 1HFY20. EPS also increased from 39 cents per share in 1HFY16 to 52.2 cents per share reported in 1HFY20.
 

Historical Financial Performance (Source: Company Reports) 

Robust 1HFY20 Results: During the six months period ended 31 December 2019, the company’s total revenues and underlying net profit increased by 25.2% and 15.8%, respectively, from prior corresponding period. Underlying EBITDA rose 13.4% year over year to $149 million. The increase in revenues illustrates the company’s portfolio strength with a substantial uplift in Pharmacy Wholesale and strong performances from TerryWhite Chemmart (TWC), Institutional Healthcare and Healthcare Logistics. The company witnessed a strong performance from its Community Pharmacy business, with revenues up 35.4% year over year. Notably, The TWC network provided 5.7% sales growth on a year over year basis, with ~16 new stores added to the network.During the period, the company witnessed continuous market share gains across Australia and New Zealand in its Healthcare Logistics business.
 

Key Highlights (Source: Company Reports)
 
Healthcare & Animal Segment Highlights: During the period, the company’s healthcare segment witnessed a revenue growth of 26.1% year over year, which came in at $4,165.5 million. The increase was aided by higher revenues from the 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. Notably, the company’s key brands Black Hawk and Vitapet provided robust impetus in revenue by growing their market share.
 

Healthcare Segment Highlight (Source: Company Reports)


Animal Care Segment Highlight (Source: Company Reports)
 
Balance Sheet and Cash flow Position: At the end of 1HFY20, the company’s cash and short-term investments 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, as compared to the net debt of $552.1 million reported in 1HFY19. The company’s current gearing continues to provide around $300 million – $350 million headroom for upcoming 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.
 
During 1HFY20, the company’s operating cash flow stood at $74.2 million before capital expenditure, 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.
 

Net Debt Movement (Source: Company Reports) 

COVID-19 Related Measures: 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. The company also refinanced ~$200 million of bank debt and working capital facilities. Further, the strong bank demand upsized these facilities by to $50 million. The company has a strong balance sheet and liquidity position to meet its ongoing business needs and growth strategy.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 35.07% 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 6.4%.
 

Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Risks Analysis: 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. Also, stiff competition from peers and a high debt remain a potential concern.
 
Outlook: 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. 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: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months.
 
Stock Recommendation: The stock of the company has corrected by 11.83% in the past six months (as at 30 June 2020). At the CMP of $20.2, the stock of the company is trading at a P/E multiple 24.17x with an annual dividend yield of 2.54%. Currently, the stock is trading below the average of its 52-week high and low price of $24.5 and $18.8, respectively. Considering the robust revenues from its Healthcare and Animal Care segments, strong cash position, and current trading levels, we have valued the stock using Price-to-Earnings multiple based illustrative relative valuation method, 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 $20.2, down 0.394% on 1 July 2020.

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

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