Ebos Group: Quality company continues to buy

About the author:

Scott Power
Author name:
By Scott Power
Job title:
Senior Analyst
Date posted:
03 September 2021, 9:00 AM
Sectors Covered:
Healthcare, Life Sciences

  • Ebos Group (ASX:EBO)  has  added  to  its  medical  consumables  portfolio,  with  the  well  flagged acquisition of a medical consumables business. 
  • EBO continues to deliver sustainable growth with all financial metrics at or above expectations  (over  the  last  eight  years  average  ROCE  >15%,  EPS  growth averaging >10%, and dividend growth averaging >11%).   
  • Although we have made no changes to our near-term forecast we have increased our long term growth rate which sees our valuation move up to (login to view). 
  • Given the recent strength in the share price we move back to a Hold (from Add) looking for a better entry point into this quality name.  

Event

As eluded to in the FY21 results, EBO has now announced the acquisition of Sentry Medical,  a  designer,  marketer  and  distributor  of  medical  consumables. 

This acquisition provides further expansion in the distribution of medical consumables for EBO’s Institutional Healthcare Division and supports EBO’s acquisitive strategy for  growth.  It  also  has the  potential  to drive  further  sales  growth  and  margin expansion.   

Analysis 

EBO has a strong balance sheet with net debt to EBITDA ratio of 0.85x and further capacity for acquisitions and capital investment. 

EBO aims to achieve market share of #1 or #2 in its key areas of focus. EBO has flagged  increasing  its  exposure  to  the  medical  device  space  with  recent acquisitions in the orthopedic and aesthetic sector generating revenue of ~$70m. 

Management estimate the division currently is the fourth largest player, so clearly there is an opportunity to grow. The acquisition of Sentry Medical adds to its market presence in the medical consumables segment which EBO classify as Institutional Health.   

EBO continues to see strength in their growing key brands, Black Hawk and Vitapet. They recently announced they will build a new pet food manufacturing facility  in Parkes in NSW. This will bring manufacturing inhouse and reduce third-party and other supply chain costs.  

The  cost  of  the  capital  investment  is  ~A$80m  and  production  is  planned  to commence late CY22. 

Forecast and valuation update

We have made no changes to forecasts for FY22/23/24 respectively. We sit broadly in line with consensus (Bloomberg) with NPAT at A$204m/A$220.9m/A$283.3m for FY22/23/24 respectively. 

We use a combined DCF/PE Compco (PE 25x) valuation methodology. We have moved our DCF valuation to A$34.86 (from A$30.50), which reflects a higher long term growth rate of 11% (was 10%) and a lower wacc of 7.0% (7.3%).

This results in a higher valuation of (login to view). We have set our target price at the same level.    

Investment view

Given the strong share price performance we now move back to Hold (from Add). We will look for a better entry point closer to A$31.00 into this quality name.   

Price catalysts 

Further bolt-on acquisitions with a particular focus in Institutional healthcare.

Performance update at AGM in 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. 

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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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