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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

EBOS Group 98th ASM&nbsp;— On Script With a Strong Print

OUTPERFORM
EBOS Group's (EBO) 1Q21 trading update confirmed a positive start to the year, with strong growth across the board and modestly ahead of our expectations.&nbsp;No FY21 guidance was provided (unsurprisingly) given it is still early in the year and in light of the uncertain backdrop. We make small upgrades following the strong start. EBO ticks a lot of boxes, particularly in the current environment, including: a solid growth outlook, defensive product categories, attractive returns and a healthy balance sheet (with growing&nbsp;optionality). Valuation remains attractive against the NZ market and defensive peers. OUTPERFORM.


What's changed?



Earnings revisions:&nbsp;+3-4% over medium-term, with a a modest lift to Animal Care and Community Pharmacy growth assumptions.
Target price:&nbsp;Lifted to NZ$29.00 (prior NZ$28.00) given earnings revisions.



Strong start to FY21


EBO provided a Q1 trading update at its ASM confirming a strong start to FY21, with revenue growth (+6.5%) and some operating leverage (EBITDA +9% and NPAT +15%). Growth was strong across the board, with Animal Care the key highlight.&nbsp;

Healthcare:&nbsp;1Q21 EBITDA up +9.2%. Limited detail was provided, but we expect growth rates were healthy across all segments, with the exception of Consumer Products which is likely still being impacted by a weak&nbsp;daigou&nbsp;channel.
Animal Care:&nbsp;1Q21 EBITDA up +18.7%, a particularly impressive result and meaningful acceleration on FY20 growth. Industry anecdotes point to a lift in pet ownership ('nesting effect') and elevated spend per pet. The latter may slow at some point, however, the trend of 'humanisation of pets' remains strong and growth is&nbsp;likely being helped by&nbsp;increasing time spent at home.



Small bolt-on acquisition in an unsurprising area...


EBO announced a small investment in the medical devices sector, with the acquisition of Cryomed Australia for A$14.1m. The acquisition itself doesn’t move the dial in terms of EBO group earnings, albeit complements its initial entry to the market (via acquisition) in October 2019. EBO has been clear it is targeting growth in the Australasian medical device sector, via both organic and acquisitive means. The sector is large (~A$8bn) and fragmented which should offer a long-term growth opportunity, albeit it may take time to build. Industry growth is attractive, and margins are healthy, hence, EBO's interest.


...balance sheet leaves ample capacity for more


EBO has a healthy balance sheet, with gearing well below the company's target range and up to A$450m capacity to deploy. Bolt-on acquisitions has been an area of added value historically, not captured in our valuation or forecasts. Although quieter than usual recently, M&amp;A remains a clear area of focus and the pipeline is "healthy". Strong cash conversion and our forecasts for an improving free cashflow profile (with major distribution facility upgrades largely complete) means optionality should continue to grow.




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




EBOS Group: 98th ASM — On Script With a Strong Print

Ebos Group Ltd

EBOS Group: 98th ASM — On Script With a Strong Print