New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>EBOS Group<br>Raison&nbsp;D'etre</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>EBOS Group (EBO) has announced the acquisition of LifeHealthcare (LHC), a large independent distributor of third-party medical devices, consumables and capital equipment. The purchase price equates to a CY22 EV/EBITDA multiple of 11.5x, which, whilst higher than previous multiples at which the business has transacted, is a 22% discount to EBO's pre-acquisition FY22 multiple of 14.8x. On face value we view the acquisition as strategically sensible, providing immediate scale in medical devices. EBO expects it to be significantly EPS accretive from FY23. Coupled with (1) EBO's continued positive trading momentum, and (2) robust valuation relative to the NZ market (24x 12 month forward PE) affirms our positive view on the stock. OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22E/FY23E/FY24E EPS changes of -2%/+16%/+17% incorporating&nbsp;the benefits of the&nbsp;LifeHealthcare&nbsp;(LHC) acquisition and underlying&nbsp;ungrades. On an underlying/organic basis we make modest EBITDA upgrades&nbsp;+4%/+3%/+3%.&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;Increased to NZ$39.20 (from NZ$37.10).</li>
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<h3>Ticking the boxes; on strategy and at a reasonable price</h3>
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<p>The acquisition is in-line with EBO's stated strategy of growing its presence in medical devices (and follows a number of small bolt-on acquisitions over the past 18 months). EBO will now become the #1 player in the Australasian medical devices category. We see a number of key strategic benefits in the acquisition, including; (1) immediate scale in the category, (2) potential for strong organic growth — EBO expects higher growth than its existing business, (3) a platform for further potential bolt-on acquisitions, and (4) entry into South East Asia (EBO's first business with direct Asia exposure). The forecast CY22 EBITDA midpoint of A$112m represents &gt;25% of our previous FY22E EBITDA forecast. EBO expects some additional modest synergies.</p>
<p>The EV/EBITDA multiple of 11.5x CY22 EBITDA is ahead of&nbsp;EBO's&nbsp;traditional acquisition valuation range (7–8x) and the multiples at which this business has transacted previously (9.5x in 2018). However, we have no immediate concerns with the price paid given:&nbsp;(1) the scale of the business, (2) current elevated multiples across the market — our previous forecast FY22E EV/EBITDA of 14.8x is +22% above&nbsp;EBO's&nbsp;five&nbsp;year average of 12.1x, and (3) 55% of the transaction has been funded by an equity raise.</p>
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<h3>FY22 trading update highlights continued positive earnings momentum</h3>
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<p>EBO provided a four months FY22 trading update showing a continued strong start to the year with group&nbsp;revenue growth of +10.6% and EBIT growth of +13.1% (Healthcare&nbsp;+12.7%, Animal Care +14.8%).&nbsp;This compares to its Q1 update of earnings and revenue growth of &gt;10%.&nbsp;&nbsp;No FY22 guidance was provided but the positive update&nbsp;emphasises the strong underlying earnings momentum in the business.</p>
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EBOS Group Raison&nbsp;D'etre

OUTPERFORM
EBOS Group (EBO) has announced the acquisition of LifeHealthcare (LHC), a large independent distributor of third-party medical devices, consumables and capital equipment. The purchase price equates to a CY22 EV/EBITDA multiple of 11.5x, which, whilst higher than previous multiples at which the business has transacted, is a 22% discount to EBO's pre-acquisition FY22 multiple of 14.8x. On face value we view the acquisition as strategically sensible, providing immediate scale in medical devices. EBO expects it to be significantly EPS accretive from FY23. Coupled with (1) EBO's continued positive trading momentum, and (2) robust valuation relative to the NZ market (24x 12 month forward PE) affirms our positive view on the stock. OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;FY22E/FY23E/FY24E EPS changes of -2%/+16%/+17% incorporating&nbsp;the benefits of the&nbsp;LifeHealthcare&nbsp;(LHC) acquisition and underlying&nbsp;ungrades. On an underlying/organic basis we make modest EBITDA upgrades&nbsp;+4%/+3%/+3%.&nbsp;
Target price:&nbsp;Increased to NZ$39.20 (from NZ$37.10).



Ticking the boxes; on strategy and at a reasonable price


The acquisition is in-line with EBO's stated strategy of growing its presence in medical devices (and follows a number of small bolt-on acquisitions over the past 18 months). EBO will now become the #1 player in the Australasian medical devices category. We see a number of key strategic benefits in the acquisition, including; (1) immediate scale in the category, (2) potential for strong organic growth — EBO expects higher growth than its existing business, (3) a platform for further potential bolt-on acquisitions, and (4) entry into South East Asia (EBO's first business with direct Asia exposure). The forecast CY22 EBITDA midpoint of A$112m represents &gt;25% of our previous FY22E EBITDA forecast. EBO expects some additional modest synergies.
The EV/EBITDA multiple of 11.5x CY22 EBITDA is ahead of&nbsp;EBO's&nbsp;traditional acquisition valuation range (7–8x) and the multiples at which this business has transacted previously (9.5x in 2018). However, we have no immediate concerns with the price paid given:&nbsp;(1) the scale of the business, (2) current elevated multiples across the market — our previous forecast FY22E EV/EBITDA of 14.8x is +22% above&nbsp;EBO's&nbsp;five&nbsp;year average of 12.1x, and (3) 55% of the transaction has been funded by an equity raise.


FY22 trading update highlights continued positive earnings momentum


EBO provided a four months FY22 trading update showing a continued strong start to the year with group&nbsp;revenue growth of +10.6% and EBIT growth of +13.1% (Healthcare&nbsp;+12.7%, Animal Care +14.8%).&nbsp;This compares to its Q1 update of earnings and revenue growth of &gt;10%.&nbsp;&nbsp;No FY22 guidance was provided but the positive update&nbsp;emphasises the strong underlying earnings momentum in the business.


Ebos Group Ltd

EBOS Group: Raison D'etre