Peter Ball, 26 October 2017

Stock Comment - EBOS Group EBO

EBO is Australasia’s largest diversified pharmaceutical and veterinary products group. The company is the result of several large acquisitions since 2007, the most transformational of which occurred in 2013 when EBO acquired Symbion Health, Australia’s largest wholesaler of pharmaceuticals.

Over the last 12 years, EBO has become the largest independent distributor of pharmaceutical and veterinary products in Australasia. Two recent acquisitions; Masterpet (a distributor of animal care products) in 2011 and Symbion Health (Australia’s largest pharmaceutical distributor) in 2013 were of sufficient scale that they have substantially changed the nature of the business. The acquisitions shifted the mix of EBO’s revenues significantly toward Australia. EBO has continued to make smaller acquisitions to augment organic growth, for example, its 2015 acquisition of Red Seal, a maker of natural health products.

EBO has recently enjoyed good momentum, delivering a number of strong results. Organic growth has been supplemented by several smaller acquisitions (e.g. Red Seal). A large chunk of the organic earnings growth has been driven by strong over the counter sales, which is being fuelled by rampant demand from Asia and has begun to moderate. However, other parts of the business such as institutional healthcare and contract logistics are also performing well.

Despite being a much larger company since the Symbion transaction, EBO has flagged further acquisitions. EBO has a strong balance sheet and existing debt facilities provide capacity for acquisitions. While EBO has a good track record in making acquisitions, a key question remains what EBO will acquire, given there are few obvious candidates in Australasia that offer synergies and are large enough to ‘move the dial’. It is likely EBO will continue to make smaller acquisitions which diversify the business away from pharmaceutical distribution.

EBO is a well managed business with solid organic growth prospects and reducing regulatory risks. The bulk of regulatory risks look to have abated for now and EBO is well placed to continue delivering organic growth and making bolt-on acquisitions. As more than 80% of EBO’s earnings are derived in Australia, EBO is a beneficiary of a weaker New Zealand dollar and is currently unhedged in this regard.

Risks to EBO include: 1) a general economic downturn in the areas that EBO operates that would negatively impact volumes and pricing, 2) unfavorable foreign exchange movements (EBO derives over 80% of earnings from Australia), and 3) a change to the current favourable industry structure via a new entrant that could increase competitive intensity and negatively impact both volumes and prices.