Ebos Group: Continues to be the boss

About the author:

Scott Power
Author name:
By Scott Power
Job title:
Senior Analyst
Date posted:
18 August 2021, 1:00 PM
Sectors Covered:
Healthcare, Life Sciences

  • Ebos Group (ASX:EBO) posted a strong FY21 result in line with our forecasts, with the highest recorded ROCE (18.0%) reflected by double digit earnings growth.
  • EBO announced strategic investments/acquisitions, pet manufacturing facility and a medical device distributor with more to come.
  • We have made modest upgrades to forecasts and move our recommendation back to Add (from Hold) with ~10% TSR.

Event: FY21 result

Ebos Group (ASX:EBO) posted a reported NPAT up 14.0% to A$185.3m (Morgans: A$185.1m). Revenue was up 5.0% to A$9.2bn and EBITDA increased by 8.9% to A$363.3m (Morgans: A$362.7m). Operating cash flow was solid, up to A$298.3m (pcp: A$229.2m) reflecting improvements in working capital.

Net debt was lower at A$271m (was A$327.0m), balance sheet looks strong with net debt/EBITDA reducing to 0.85x (pcp: 1.1x) with significant capacity to continue funding future growth opportunities in medical device and consumer space. Working capital remains solid with cash conversion cycle of 14 days (15 days pcp).

EBO continues to impress in terms of its return on capital employed (ROCE) recording its highest ever of 18.0%, up on 17.1% the pcp. A final fully franked dividend of NZ$0.46cps was declared, bringing the full year to NZ$0.885 (up 14.2%). Underlying EPS was 114.9 cents (up 14.2% pcp).

Divisional performance

Healthcare (95% of revenue) was up 4.4% to A$8.7bn and underlying EBIT was up 11.4% to A$254.9m, supported by increased wholesale volumes and cost savings from productivity improvements.

The key components include: 1) Community Pharmacy (up 3.5% - which now includes consumer products), was driven by strong performance in Terry White Chemist (addition of 36 new pharmacies and total sales up 5.3%) despite OTC sales which declined by 7.6%; 2) Institutional Healthcare (up 4.7%) assisted by growth in specialty medicines and acquisition in medical devices sector; and 3) Contract logistics (up 13.4%) which is now at capacity.

Animal care (5% of revenue) was up 17% to A$497.5m, and underlying EBITDA increased by 26.4% to A$62.9m which reflected strong Black Hawk sales (up 12.4%) and Lyppard sales from acquisition of CH2’s vet distribution business (up 20.7%).

EBO continues its strategy to invest for growth with the announcement of an $80m investment to develop a new state-of-the-art Black Hawk pet food manufacturing facility - enabling flexibility and speed to market of new product developments derived from market trends, as well as navigating third party supply chain risk.

Forecast and valuation update

No FY22 guidance was provided however management remained positive that growth is expected to continue. EBO also revised its dividend policy declaring a payout ratio of between 60-80% of NPAT (in line with 72% payout ratio over the past 5 years).

We have made only minor upgrades to forecasts of 1.2%/1.9% for FY22/23 respectively. Our combined DCF/PE Compco (PE 25x) valuation methodology places a higher valuation of (login to view target price).

Investment view

We rate the management team and consistent financial performance highly. We have moved our recommendation to Add (from Hold) with ~10% TSR on offer.

Price catalysts

Further acquisitions in the Institutional Healthcare division.

Performance update at AGM on 19 October 2021.

Risks

The key downside risk is extended disruptions caused by COVID issues creating supply chain issues, as well as impact of recent lockdowns in NSW and VIC.

The key upside risk is a worse flu season creating increased demand through the pharmacy channel.

Find out more

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You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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