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<br>Consistent Delivery; Up to OUTPERFORM</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>We upgrade our rating on EBOS Group (EBO) to OUTPERFORM. EBO has underperformed the NZ market year-to-date which is counter-intuitive to its defensive attributes and the recent lowering of regulatory risk. We attribute this to the overhang of its major shareholder (Sybos Holdings) selling down, with the remaining shares off voluntary escrow (again) this week. Taking this aside (and acknowledging risk of short-term digestion from any further sell-down) we believe current valuation metrics are attractive and offer a good entry point for a well-run, defensive company which delivers healthy returns, consistently strong cash conversion and has a solid growth outlook. The business is performing well and EBO's FY20 result provided further evidence of the resilience of the model and strong execution in what has been a volatile backdrop.</p>
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<h3>There's a lot to like...</h3>
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<li><strong>Defensive&nbsp;products and w​​​​ell positioned through&nbsp;COVID-19</strong>:&nbsp;Key category exposures include: pharmacy, hospital and&nbsp;petcare; categories which are largely&nbsp;defensive&nbsp;through the cycle. While there is risk of short-term periods of disruption, recent events (COVID-19, bush fires)&nbsp;have also&nbsp;proven&nbsp;the value of a well functioning, efficient, supply chain; with&nbsp;EBO&nbsp;critical to this.</li>
<li><strong>Healthy balance sheet, with c. A$400–450m capacity to deploy</strong>:&nbsp;Bolt-on acquisitions has been&nbsp;an area of added value historically (not captured in our valuation).&nbsp;EBO&nbsp;has shown a disciplined approach to managing cash and deploying capital through history. It has been relatively quiet over FY20, however, management reiterated the pipeline is "healthy" and we understand vendor expectations have improved in the small to medium-size segment.</li>
<li><strong>Modest cash yield</strong>:&nbsp;12m forward cash yield of ~4% (payout ratio ~70%), with expectations for continued dividend growth.</li>
<li><strong>Attractive and improving free&nbsp;cashflow&nbsp;yield</strong>:&nbsp;With&nbsp;EBO's&nbsp;major distribution facility upgrades largely complete, we forecast an improving free&nbsp;cashflow&nbsp;(FCF) profile (FCF&nbsp;yield: FY21E 6.0%; FY22E 6.5%).</li>
<li><strong>Regulation</strong>:&nbsp;The recent 7th Community Pharmacy Agreement (2020 to 2025) has removed a key area of uncertainty and also saw a modest positive outcome for&nbsp;EBO&nbsp;(small lift in funding and medium-term positive from introducing a floor for low value products).</li>
<li><strong>Valuation metrics</strong>: EBO trades at a meaningful discount to the NZ market (near all-time highs; with PE relative of ~0.6x vs a 5 year average of ~0.9x) and at the lower end of NZ defensive peers. We see attractive value on both an absolute and relative basis.</li>
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<h3>FY20 result take-aways&nbsp;—&nbsp;overs&nbsp;and&nbsp;unders, but performing as it should</h3>
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<p>EBO delivered an FY20 result marginally short of our top-of consensus expectations, albeit with strong profit growth of c. +13% through the period. EBO referenced a broadly neutral impact of COVID-19 to date and like many companies highlighted uncertainty in providing outlook. It is early days, however, FY21 has started well (and better than management expectations) with EBITDA +6.5% in July. We make small downgrades to our medium-term forecasts of c. -2% (albeit with some mix differences). We lift our target price to NZ$28.00 (+14%) primarily due to revisions to our team cost of capital inputs.</p>
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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>
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EBOS Group Consistent Delivery; Up to OUTPERFORM

OUTPERFORM
We upgrade our rating on EBOS Group (EBO) to OUTPERFORM. EBO has underperformed the NZ market year-to-date which is counter-intuitive to its defensive attributes and the recent lowering of regulatory risk. We attribute this to the overhang of its major shareholder (Sybos Holdings) selling down, with the remaining shares off voluntary escrow (again) this week. Taking this aside (and acknowledging risk of short-term digestion from any further sell-down) we believe current valuation metrics are attractive and offer a good entry point for a well-run, defensive company which delivers healthy returns, consistently strong cash conversion and has a solid growth outlook. The business is performing well and EBO's FY20 result provided further evidence of the resilience of the model and strong execution in what has been a volatile backdrop.


There's a lot to like...



Defensive&nbsp;products and w​​​​ell positioned through&nbsp;COVID-19:&nbsp;Key category exposures include: pharmacy, hospital and&nbsp;petcare; categories which are largely&nbsp;defensive&nbsp;through the cycle. While there is risk of short-term periods of disruption, recent events (COVID-19, bush fires)&nbsp;have also&nbsp;proven&nbsp;the value of a well functioning, efficient, supply chain; with&nbsp;EBO&nbsp;critical to this.
Healthy balance sheet, with c. A$400–450m capacity to deploy:&nbsp;Bolt-on acquisitions has been&nbsp;an area of added value historically (not captured in our valuation).&nbsp;EBO&nbsp;has shown a disciplined approach to managing cash and deploying capital through history. It has been relatively quiet over FY20, however, management reiterated the pipeline is "healthy" and we understand vendor expectations have improved in the small to medium-size segment.
Modest cash yield:&nbsp;12m forward cash yield of ~4% (payout ratio ~70%), with expectations for continued dividend growth.
Attractive and improving free&nbsp;cashflow&nbsp;yield:&nbsp;With&nbsp;EBO's&nbsp;major distribution facility upgrades largely complete, we forecast an improving free&nbsp;cashflow&nbsp;(FCF) profile (FCF&nbsp;yield: FY21E 6.0%; FY22E 6.5%).
Regulation:&nbsp;The recent 7th Community Pharmacy Agreement (2020 to 2025) has removed a key area of uncertainty and also saw a modest positive outcome for&nbsp;EBO&nbsp;(small lift in funding and medium-term positive from introducing a floor for low value products).
Valuation metrics: EBO trades at a meaningful discount to the NZ market (near all-time highs; with PE relative of ~0.6x vs a 5 year average of ~0.9x) and at the lower end of NZ defensive peers. We see attractive value on both an absolute and relative basis.



FY20 result take-aways&nbsp;—&nbsp;overs&nbsp;and&nbsp;unders, but performing as it should


EBO delivered an FY20 result marginally short of our top-of consensus expectations, albeit with strong profit growth of c. +13% through the period. EBO referenced a broadly neutral impact of COVID-19 to date and like many companies highlighted uncertainty in providing outlook. It is early days, however, FY21 has started well (and better than management expectations) with EBITDA +6.5% in July. We make small downgrades to our medium-term forecasts of c. -2% (albeit with some mix differences). We lift our target price to NZ$28.00 (+14%) primarily due to revisions to our team cost of capital inputs.




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




EBOS Group: Consistent Delivery; Up to OUTPERFORM

Ebos Group Ltd

EBOS Group: Consistent Delivery; Up to OUTPERFORM