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>FY21 Result&nbsp;— Steady as She Goes</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>EBOS Group (EBO) reported a strong FY21 result, in line with our expectations, with growth across the board. There is no change to our expectations for a solid growth outlook from here, with upside&nbsp;from any meaningful capital deployment.&nbsp;We remain attracted to&nbsp;EBO's&nbsp;defensive product exposures, conservative balance sheet, strong return on capital and track record of execution, particularly&nbsp;on cash conversion.&nbsp;At ~24x one year forward PE we continue to see relative value against the NZ market, particularly defensive and large cap peers. Retain OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<ul>
<li><strong>Earnings</strong>:&nbsp;EBITDA up +2–5% primarily due to signalled investment. NPAT revisions more moderate due to higher depreciation.</li>
<li><strong>Target price</strong>:&nbsp;NZ$35.25, up +3%, with earnings revisions outweighing higher&nbsp;capex&nbsp;/ investment.</li>
</ul>
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<h3>Key points of interest</h3>
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<ul>
<li><strong>Strong result across the board</strong> —&nbsp;Animal Care the key standout:&nbsp;
<ul>
<li>Healthcare: EBITDA up +9%. Growth was broad-based, with strong results in Institutional&nbsp;Healthcare&nbsp;and Contracts Logistics led by further market share gains. Community Pharmacy was solid (revenue up +4%, in-line with market growth)&nbsp;helped by&nbsp;EBO's&nbsp;skew towards&nbsp;ethical products (up ~+5–6% in Australia) versus over-the-counter (down ~-7%). Consumer Products was the only area of weakness, primarily due to COVID-19 related pressures (daigou, materially reduced cold &amp; flu season).</li>
<li>Animal Care: A stellar period, with EBITDA up +20%. This reflects (1) industry tailwinds&nbsp;accelerated by COVID-19, including higher spend per pet and increased pet ownership, (2) market share gains, (3) modest boost&nbsp;from a vet wholesale acquisition.&nbsp;</li>
<li>Corporate costs: A material step-up (+54%) due to insurance and staff (expanded LTI and new employee share scheme). &nbsp;</li>
</ul>
</li>
<li><strong>Outlook for "further growth", albeit COVID-19 likely to see volatility</strong>:&nbsp;No FY22 guidance was provided (as usual), but commentary suggests July trading was solid, but August has potentially been weaker (Australian COVID-19 restrictions). We assume continued monthly volatility through FY22&nbsp;but&nbsp;expect&nbsp;EBO's&nbsp;defensive product exposures to remain resilient. We also forecast modest margin expansion — with cost inflation outweighed&nbsp;by stronger growth in higher margin segments and efficiency gains.</li>
<li><strong>Dividend — consistent growth continues, payout remains conservative</strong>.&nbsp;FY21 dividend of NZ88.5cps (+14%), cash yield ~3%.&nbsp;</li>
<li><strong>Strong return on capital employed</strong>:&nbsp;18% in FY21, well ahead of internal targets (&gt;15%) and a lift on recent levels.&nbsp;</li>
<li><strong>Material balance sheet headroom, even incorporating signalled investment</strong>:&nbsp;Gearing is conservative, with FY21 net debt to EBITDA (excluding IFRS-16 leases) of 0.85x. EBO has signalled a step-up in near-term investment across logical areas (Animal Care manufacturing facility, small bolt-on acquisitions in medical device distribution and Institutional&nbsp;Healthcare). The company has a strong track record of deploying capital and we have given EBO the benefit of the doubt on hitting return targets. Even incorporating the extra investment, we estimate meaningful balance sheet headroom (&gt;A$400m) —&nbsp;with M&amp;A likely to remain&nbsp;focussed&nbsp;on small bolt-ons&nbsp;where we expect valuation multiples are more reasonable.</li>
</ul>
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EBOS Group FY21 Result&nbsp;— Steady as She Goes

OUTPERFORM
EBOS Group (EBO) reported a strong FY21 result, in line with our expectations, with growth across the board. There is no change to our expectations for a solid growth outlook from here, with upside&nbsp;from any meaningful capital deployment.&nbsp;We remain attracted to&nbsp;EBO's&nbsp;defensive product exposures, conservative balance sheet, strong return on capital and track record of execution, particularly&nbsp;on cash conversion.&nbsp;At ~24x one year forward PE we continue to see relative value against the NZ market, particularly defensive and large cap peers. Retain OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;EBITDA up +2–5% primarily due to signalled investment. NPAT revisions more moderate due to higher depreciation.
Target price:&nbsp;NZ$35.25, up +3%, with earnings revisions outweighing higher&nbsp;capex&nbsp;/ investment.



Key points of interest



Strong result across the board —&nbsp;Animal Care the key standout:&nbsp;

Healthcare: EBITDA up +9%. Growth was broad-based, with strong results in Institutional&nbsp;Healthcare&nbsp;and Contracts Logistics led by further market share gains. Community Pharmacy was solid (revenue up +4%, in-line with market growth)&nbsp;helped by&nbsp;EBO's&nbsp;skew towards&nbsp;ethical products (up ~+5–6% in Australia) versus over-the-counter (down ~-7%). Consumer Products was the only area of weakness, primarily due to COVID-19 related pressures (daigou, materially reduced cold &amp; flu season).
Animal Care: A stellar period, with EBITDA up +20%. This reflects (1) industry tailwinds&nbsp;accelerated by COVID-19, including higher spend per pet and increased pet ownership, (2) market share gains, (3) modest boost&nbsp;from a vet wholesale acquisition.&nbsp;
Corporate costs: A material step-up (+54%) due to insurance and staff (expanded LTI and new employee share scheme). &nbsp;


Outlook for "further growth", albeit COVID-19 likely to see volatility:&nbsp;No FY22 guidance was provided (as usual), but commentary suggests July trading was solid, but August has potentially been weaker (Australian COVID-19 restrictions). We assume continued monthly volatility through FY22&nbsp;but&nbsp;expect&nbsp;EBO's&nbsp;defensive product exposures to remain resilient. We also forecast modest margin expansion — with cost inflation outweighed&nbsp;by stronger growth in higher margin segments and efficiency gains.
Dividend — consistent growth continues, payout remains conservative.&nbsp;FY21 dividend of NZ88.5cps (+14%), cash yield ~3%.&nbsp;
Strong return on capital employed:&nbsp;18% in FY21, well ahead of internal targets (&gt;15%) and a lift on recent levels.&nbsp;
Material balance sheet headroom, even incorporating signalled investment:&nbsp;Gearing is conservative, with FY21 net debt to EBITDA (excluding IFRS-16 leases) of 0.85x. EBO has signalled a step-up in near-term investment across logical areas (Animal Care manufacturing facility, small bolt-on acquisitions in medical device distribution and Institutional&nbsp;Healthcare). The company has a strong track record of deploying capital and we have given EBO the benefit of the doubt on hitting return targets. Even incorporating the extra investment, we estimate meaningful balance sheet headroom (&gt;A$400m) —&nbsp;with M&amp;A likely to remain&nbsp;focussed&nbsp;on small bolt-ons&nbsp;where we expect valuation multiples are more reasonable.



EBOS Group: FY21 Result — Steady as She Goes

Ebos Group Ltd

EBOS Group: FY21 Result — Steady as She Goes