New Zealand Professional Investment Services Firm

Forsyth Barr

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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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>EBOS Group<br>1H21 Result&nbsp;— Just What the Doctor Ordered</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>EBOS Group (EBO)&nbsp;reported a strong 1H21 result, modestly ahead of our expectations, and confirmed this strength has continued into 2H21. Growth drivers were broad-based, including market share gains, margin expansion/operating leverage, attractive industry growth and a modest net benefit from COVID-19.&nbsp;EBO is a quality business with an impressive track record of execution, a positive growth outlook, defensive product exposures and a conservative balance sheet which offers ample&nbsp;optionality. Recent share price strength has lifted&nbsp;EBO's&nbsp;one year forward PE to ~23x, which we still view as relatively attractive in the NZ market, particularly against defensive peers. Retain OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<ul>
<li><strong>Earnings</strong>:&nbsp;Upgraded +2–3% over&nbsp;our forecast horizon. Dividend forecasts lifted +4-6%.</li>
<li><strong>Target price</strong>:&nbsp;Lifted to NZ$​​​​​​​31.75. This reflects earnings changes, favourable mix shift (towards segments with higher margins and peer multiples) and higher peer multiples, which outweigh a small lift in cost of capital following revisions to our team inputs.</li>
</ul>
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<h3>Key areas of interest</h3>
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<ul>
<li><strong>Strong result, largely across the board</strong>&nbsp;— with Animal Care the key standout
<ul>
<li>Healthcare: EBITDA up +10%. Growth was above historical averages across core segments, Community Pharmacy and Institutional&nbsp;Healthcare, while Contract Logistics continues to win new business. Consumer Products was the only blemish, primarily due to COVID-19 related pressure (daigou, materially reduced cold &amp; flu season).</li>
<li>Animal Care:&nbsp;A stellar period, with EBITDA up +19%. This reflects industry tailwinds, accelerated by COVID-19, including the humanisation of pets, higher spend per pet and increased pet ownership. We expect EBO also increased its market share.&nbsp;</li>
<li>Corporate costs: A material step-up to a 'new base', with greater investment in staff and higher insurance premiums.</li>
</ul>
</li>
<li><strong>Outlook comments positive</strong>:&nbsp;No FY21 guidance, but 2H21 has started well (growth &amp; trends consistent with 1H21). We also see potential for modest margin&nbsp; expansion&nbsp;— operating leverage and expectations of stronger growth in its higher margin segments.</li>
<li>​​​​​​​<strong>Strong free&nbsp;cashflow&nbsp;generation</strong>:&nbsp;Cash conversion is a key strength and 1H21 was no different. Adjusting for a delay in some&nbsp;capex&nbsp;spend due to COVID-19, we estimate free&nbsp;cashflow&nbsp;growth of ~+30% (vs reported growth of 46%).</li>
<li><strong>Net beneficiary of COVID-19 through the period:</strong>&nbsp;COVID-19 materially influenced a number of&nbsp;EBO's&nbsp;businesses,&nbsp;both negatively and positively. On balance EBO was a modest net beneficiary (+2% boost to growth). Nonetheless, we don’t expect this to all unwind, with some sustainable changes (e.g. increased pet ownership) and likely reversal of weak/strong areas as consumer mobility increases. Vaccine&nbsp;rollout&nbsp;in Australasian pharmacies may also support foot traffic in-store.</li>
<li><strong>Material (and growing) balance sheet headroom</strong>:&nbsp;Gearing is conservative (net debt to EBITDA of 1.0x) and we estimate capacity of A$500–550m available to deploy.&nbsp;Bolt-on acquisitions has been an area of added value historically&nbsp;(not captured in our valuation). It&nbsp;has been quiet over the past 18 months, however,&nbsp;we understand the pipeline is "healthy" and vendor&nbsp;expectations not a barrier.</li>
<li><strong>Dividend — consistent growth continues, payout remains conservative</strong></li>
</ul>
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<div><strong>Chelsea Leadbetter CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
</div>
</div>
</div>

EBOS Group 1H21 Result&nbsp;— Just What the Doctor Ordered

OUTPERFORM
EBOS Group (EBO)&nbsp;reported a strong 1H21 result, modestly ahead of our expectations, and confirmed this strength has continued into 2H21. Growth drivers were broad-based, including market share gains, margin expansion/operating leverage, attractive industry growth and a modest net benefit from COVID-19.&nbsp;EBO is a quality business with an impressive track record of execution, a positive growth outlook, defensive product exposures and a conservative balance sheet which offers ample&nbsp;optionality. Recent share price strength has lifted&nbsp;EBO's&nbsp;one year forward PE to ~23x, which we still view as relatively attractive in the NZ market, particularly against defensive peers. Retain OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;Upgraded +2–3% over&nbsp;our forecast horizon. Dividend forecasts lifted +4-6%.
Target price:&nbsp;Lifted to NZ$​​​​​​​31.75. This reflects earnings changes, favourable mix shift (towards segments with higher margins and peer multiples) and higher peer multiples, which outweigh a small lift in cost of capital following revisions to our team inputs.



Key areas of interest



Strong result, largely across the board&nbsp;— with Animal Care the key standout

Healthcare: EBITDA up +10%. Growth was above historical averages across core segments, Community Pharmacy and Institutional&nbsp;Healthcare, while Contract Logistics continues to win new business. Consumer Products was the only blemish, primarily due to COVID-19 related pressure (daigou, materially reduced cold &amp; flu season).
Animal Care:&nbsp;A stellar period, with EBITDA up +19%. This reflects industry tailwinds, accelerated by COVID-19, including the humanisation of pets, higher spend per pet and increased pet ownership. We expect EBO also increased its market share.&nbsp;
Corporate costs: A material step-up to a 'new base', with greater investment in staff and higher insurance premiums.


Outlook comments positive:&nbsp;No FY21 guidance, but 2H21 has started well (growth &amp; trends consistent with 1H21). We also see potential for modest margin&nbsp; expansion&nbsp;— operating leverage and expectations of stronger growth in its higher margin segments.
​​​​​​​Strong free&nbsp;cashflow&nbsp;generation:&nbsp;Cash conversion is a key strength and 1H21 was no different. Adjusting for a delay in some&nbsp;capex&nbsp;spend due to COVID-19, we estimate free&nbsp;cashflow&nbsp;growth of ~+30% (vs reported growth of 46%).
Net beneficiary of COVID-19 through the period:&nbsp;COVID-19 materially influenced a number of&nbsp;EBO's&nbsp;businesses,&nbsp;both negatively and positively. On balance EBO was a modest net beneficiary (+2% boost to growth). Nonetheless, we don’t expect this to all unwind, with some sustainable changes (e.g. increased pet ownership) and likely reversal of weak/strong areas as consumer mobility increases. Vaccine&nbsp;rollout&nbsp;in Australasian pharmacies may also support foot traffic in-store.
Material (and growing) balance sheet headroom:&nbsp;Gearing is conservative (net debt to EBITDA of 1.0x) and we estimate capacity of A$500–550m available to deploy.&nbsp;Bolt-on acquisitions has been an area of added value historically&nbsp;(not captured in our valuation). It&nbsp;has been quiet over the past 18 months, however,&nbsp;we understand the pipeline is "healthy" and vendor&nbsp;expectations not a barrier.
Dividend — consistent growth continues, payout remains conservative





Chelsea Leadbetter CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262




EBOS Group: 1H21 Result — Just What the Doctor Ordered

Ebos Group Ltd

EBOS Group: 1H21 Result — Just What the Doctor Ordered