EBO SP Thread, page-2

Copying a post I placed on the NZ Investors Group on Facebook:

EBOS group is a major supplier of wholesale pharmaceutical, healthcare and veterinary products in both Australia and New Zealand. It started back in 1922 as Early Bros Dental & Surgical Supplies Ltd and is one of the few NZ companies that has really done good in Australia.

According to the company’s annual report EBOS is active over a variety of health and pet care sectors. Within the Healthcare sectors, EBOS provides products into the community pharmacy and institutional healthcare sectors. It is now realising the rewards of winning a major supply contract with the Chemist Warehouse group expected to yield over A$1 billion per year over 5 years. It also provides specialist contract logistics (including pharmacy-only secured pharmaceuticals) throughout Australasia, along with clinical trial management, and product registration services. Through the acquisition of manufacturing businesses and agencies over the last two decades community pharmacy now makes up 57% of sales and institutional healthcare makes up another 29% of sales.

EBOS seems to have adopted the McKinsey ‘third horizon philosophy’, with expansion into FMCG consumer products and Veterinary / Petcare sectors (4.8% of sales).

EBOS turned over a significant $8.765 Billion in the 2020 financial year. It bounced back from a mediocre year in 2019 and made a gross profit of $333.6M ($161.5M after tax). The balance sheet is pretty optimal. EBOS has effectively inventory control, good collection and an asset turnover ratio of 2.34. Its debt is reasonable with a debt ration (total liabilities to total assets) at 65%, up from 61% in the previous year. It has used debt wisely to fund its M&A program and achieved efficiencies along the way. And let’s face it: debt is pretty cheap at the moment.

At around $NZ29 per share EBOS is no bargain. It has a P/E of around 27, and a dividend yield of only 2.75%. I liked it a lot more when it was sub $10.What keeps me invested in EBOS is their relative performance compared to their peers.

Both API and Sigma Healthcare Ltd are also pharmacy wholesale and distribution businesses based in Australia. API distributes both through wholesale channels and through a range of retail pharmacy operations. API also has a manufacturing cosmetic operation. Sigma also operates through wholesale distribution and retail pharmacies but minimal presence in FMCG.

EBOS operates at a significantly better gross margin (10.5%) than Sigma (6.6%) but less than the gross margin achieved by API (12.9%). The low margins surprised me. I expected more operating margin for specialised medical-type products.

However while API had a better gross margin than EBOS, API was unable to turn this margin advantage into a better Return on Assets result, achieving on 3.4% return on assets versus EBOS 4.3% return on assets.I played around with some modelling and found that allowing for 4% organic growth in the 2020-2021 financial year, while increasing gross margin from 10.5% to 11.5% , EBOS could possibly achieve a 37.8% increase in EBITDA by an additional $NZD 125 million. That’s a lot.

There are also significant barrier to entry of competitors. Pharmaceutical warehousing and distribution requires exacting quality systems. EBOS has quality systems that comply with the Therapeutic Goods Act, along with bonded and security systems for prescribed medicines. EBOS also appears to have developed a skilled technical team proficient in pharmacological and medical science, enabling them to service the health care sectors. While there is vigorous competitor activity from both API and Sigma, EBOS has been able to achieve a position of market strength in both Australia and New Zealand.

EBOS sits at about #13 or #14 on the NZX50 index. It’s not as sexy as Tesla or Silver or bitcoin, but you’ll stand a decent chance of getting your investment back, and then some. Please do your own research.