WEEKLY STOCK COMMENT: EBOS GROUP
Roy Davidson, 13 September 2018
EBOS Group (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 decade, 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. EBO has continued to make further acquisitions to augment organic growth, including its 2015 acquisition of Red Seal (maker of natural health products) and HPS in 2017 (outsourced pharmacy services).
EBO has recently enjoyed good momentum, delivering a number of strong results. Organic growth has been supplemented by several smaller acquisitions. A large chunk of the organic earnings growth has historically been driven by strong over the counter sales, which is being fuelled by rampant demand from Asia - this has now begun to moderate. However, other parts of the business such as institutional healthcare and contract logistics are also performing well.
EBO has won the tender to act as the exclusive third party distributor of pharmaceutical products to more than 400 Chemist Warehouse and My Chemist stores in Australia. A five-year supply agreement, expected to take effect from 1 July 2019, has the potential for an extension for a further 3 years. EBOS estimates that sales to the Chemist Warehouse Group stores will generate approximately AU$1bn in revenue in FY20. Post the Chemist Warehouse deal EBOS will be, by a wide margin, the largest scale drug wholesaler in Australia and NZ giving it a sustainable cost advantage over competitors.
EBO is a well-managed business with solid growth prospects and reducing regulatory risks. EBO is well placed to continue delivering organic growth and making bolt-on acquisitions. While there is some speculation regarding the longer term threat Amazon may pose to EBO (Amazon now licenced to distribute products in some US states), the company has not yet made any announcement regarding a move into the drug wholesale market in the US, let alone Australia. Continued industry consolidation (led by EBO), major contract wins, and a falling capex intensity (allowing for higher dividends and more M&A), EBO is well placed to grow over the medium term.
Risks to EBO include: 1) Major contract loss, 2) unsuccessful acquisitions, 3) increased competition.