New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>EBOS Group</h2>
<p><strong>1H20&nbsp;Preview&nbsp;— Chemist Warehouse Injection</strong></p>
<p>Chelsea Leadbetter CFA<br>chelsea.leadbetter@forsythbarr.co.nz<br>+64 4 495 5262</p>
<p><strong>NEUTRAL&nbsp;</strong></p>
<p>We expect a strong headline 1H20 result from&nbsp;EBOS&nbsp;Group (EBO) on 20 February, with modest underlying earnings growth topped up by the first-time contribution of its new contract with Chemist Warehouse (CW) in Australia. Key focus areas are (1) any greater clarity on FY20 guidance; (2) M&amp;A update, (3) cash conversion, particularly given the recent&nbsp;step-change in volumes the company is handling, and (4) industry backdrop commentary (particularly for Community Pharmacy).</p>
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">EBO</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$23.62</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">147.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">182.5</td>
<td style="text-align: left; width: 48pt;">191.3</td>
<td style="text-align: left; width: 48pt;">203.9</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">14.4</td>
<td style="text-align: left; width: 48pt;">12.3</td>
<td style="text-align: left; width: 48pt;">11.9</td>
<td style="text-align: left; width: 48pt;">11.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$24.00</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">96.4</td>
<td style="text-align: left; width: 48pt;">112.9</td>
<td style="text-align: left; width: 48pt;">118.3</td>
<td style="text-align: left; width: 48pt;">126.1</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">16.4</td>
<td style="text-align: left; width: 48pt;">14.1</td>
<td style="text-align: left; width: 48pt;">13.6</td>
<td style="text-align: left; width: 48pt;">13.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">-2.1</td>
<td style="text-align: left; width: 48pt;">17.1</td>
<td style="text-align: left; width: 48pt;">4.8</td>
<td style="text-align: left; width: 48pt;">6.6</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">24.5</td>
<td style="text-align: left; width: 48pt;">20.9</td>
<td style="text-align: left; width: 48pt;">20.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">18.7</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">152.5m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">71.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">84.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">89.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">89.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">27.1</td>
<td style="text-align: left; width: 48pt;">19.3</td>
<td style="text-align: left; width: 48pt;">14.5</td>
<td style="text-align: left; width: 48pt;">11.1</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$3,603m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">25</td>
<td style="text-align: left; width: 48pt;">25</td>
<td style="text-align: left; width: 48pt;">25</td>
<td style="text-align: left; width: 48pt;">25</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">3.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.6</td>
<td style="text-align: left; width: 48pt;">3.8</td>
<td style="text-align: left; width: 48pt;">3.8</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">150.1k (NZ$3,426k)</td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">3.3</td>
<td style="text-align: left; width: 48pt;">3.9</td>
<td style="text-align: left; width: 48pt;">4.1</td>
<td style="text-align: left; width: 48pt;">4.1</td>
</tr>
</tbody>
</table>
<p><strong>Key points of interest</strong></p>
<ul type="disc">
<li>Any greater clarity on FY20 guidance:&nbsp;Guidance is for “a significant increase in earnings in FY20” —&nbsp;not surprising given the first-time contribution from its contract with CW.&nbsp;Our current forecast is for FY20&nbsp;EBITDA&nbsp;of A$302m, up +15% on the prior year.</li>
<li>First contribution from&nbsp;wholesale contract with CW in Australia:&nbsp;EBO&nbsp;commenced its supply contract with CW on 1 July 2019. We look for any insight into earnings contribution, growth outlook and contract margin / returns.</li>
<li>Update on pharmacy backdrop and outlook:&nbsp;Topical given material change underway in Australia — with negotiations underway for the next Community Pharmacy regulatory agreement (due to roll-over 1 July 2020), the recent change in suppliers for CW, and&nbsp;a move back into the wholesale channel (away from direct distribution) for some manufacturers.</li>
<li>Divisional detail —&nbsp;expecting growth across the board:&nbsp;We expect consistent trends to the FY19 result —&nbsp;with strength in Hospital volumes, branded product and Contract Logistics outweighing pressure in Community Pharmacy (ex CW) and cost inflation in NZ.</li>
<li>Cash conversion:&nbsp;We look for confirmation&nbsp;EBO&nbsp;can maintain strong cash conversion following the recent step-change in volumes.&nbsp;</li>
<li>M&amp;A update:&nbsp;EBO&nbsp;has a well signalled and consistent bolt-on acquisitive strategy.&nbsp;Given the recent $175m capital raise in May 2019 we expect further small to mid-sized acquisitions near-term. We estimate current balance sheet headroom of ~A$300m.</li>
</ul>
<p><strong>Conference call — 11:30am NZ time on 20 February</strong></p>
<p>Dial in details are 0800 667 018 for New Zealand (1800 148 258 for Australia); conference ID is 1880317.</p>

EBOS Group
1H20&nbsp;Preview&nbsp;— Chemist Warehouse Injection
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262
NEUTRAL&nbsp;
We expect a strong headline 1H20 result from&nbsp;EBOS&nbsp;Group (EBO) on 20 February, with modest underlying earnings growth topped up by the first-time contribution of its new contract with Chemist Warehouse (CW) in Australia. Key focus areas are (1) any greater clarity on FY20 guidance; (2) M&amp;A update, (3) cash conversion, particularly given the recent&nbsp;step-change in volumes the company is handling, and (4) industry backdrop commentary (particularly for Community Pharmacy).



NZX Code
EBO
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$23.62
NPAT* (NZ$m)
147.0&nbsp;
182.5
191.3
203.9
EV/EBITDA
14.4
12.3
11.9
11.4&nbsp;


Target Price
NZ$24.00
EPS* (NZc)
96.4
112.9
118.3
126.1
EV/EBIT
16.4
14.1
13.6
13.0&nbsp;


Risk rating
Medium
EPS growth* (%)
-2.1
17.1
4.8
6.6
PE
24.5
20.9
20.0&nbsp;
18.7


Issued shares
152.5m
DPS (NZc)
71.5&nbsp;
84.0&nbsp;
89.0&nbsp;
89.0&nbsp;
Price/NTA
27.1
19.3
14.5
11.1


Market cap
NZ$3,603m
Imputation (%)
25
25
25
25
Cash div yld (%)
3.0&nbsp;
3.6
3.8
3.8


Avg daily turnover
150.1k (NZ$3,426k)
*Based on normalised profits


Gross div yld (%)
3.3
3.9
4.1
4.1



Key points of interest

Any greater clarity on FY20 guidance:&nbsp;Guidance is for “a significant increase in earnings in FY20” —&nbsp;not surprising given the first-time contribution from its contract with CW.&nbsp;Our current forecast is for FY20&nbsp;EBITDA&nbsp;of A$302m, up +15% on the prior year.
First contribution from&nbsp;wholesale contract with CW in Australia:&nbsp;EBO&nbsp;commenced its supply contract with CW on 1 July 2019. We look for any insight into earnings contribution, growth outlook and contract margin / returns.
Update on pharmacy backdrop and outlook:&nbsp;Topical given material change underway in Australia — with negotiations underway for the next Community Pharmacy regulatory agreement (due to roll-over 1 July 2020), the recent change in suppliers for CW, and&nbsp;a move back into the wholesale channel (away from direct distribution) for some manufacturers.
Divisional detail —&nbsp;expecting growth across the board:&nbsp;We expect consistent trends to the FY19 result —&nbsp;with strength in Hospital volumes, branded product and Contract Logistics outweighing pressure in Community Pharmacy (ex CW) and cost inflation in NZ.
Cash conversion:&nbsp;We look for confirmation&nbsp;EBO&nbsp;can maintain strong cash conversion following the recent step-change in volumes.&nbsp;
M&amp;A update:&nbsp;EBO&nbsp;has a well signalled and consistent bolt-on acquisitive strategy.&nbsp;Given the recent $175m capital raise in May 2019 we expect further small to mid-sized acquisitions near-term. We estimate current balance sheet headroom of ~A$300m.

Conference call — 11:30am NZ time on 20 February
Dial in details are 0800 667 018 for New Zealand (1800 148 258 for Australia); conference ID is 1880317.

EBOS Group: 1H20 Preview — Chemist Warehouse Injection

Ebos Group Ltd

EBOS Group: 1H20 Preview — Chemist Warehouse Injection