Ebos Group – A big fish landed

About the author:

Scott Power
Author name:
By Scott Power
Job title:
Senior Analyst
Date posted:
03 July 2018, 4:10 PM
Sectors Covered:
Healthcare, Life Science and Technology

Chemist Warehouse changes distributor

Ebos Group (EBO) has been notified that it has won the tender to act as the exclusive third party distributor of pharmaceutical products (not the over the counter range) to more than 400 Chemist Warehouse and My Chemist stores in Australia. Both parties expect to enter into a five-year supply agreement, to take effect from 1 July 2019, with the potential for an extension for a further three years.

EBO estimates that sales to the Chemist Warehouse Group (CW) stores will generate approximately NZ$1.1bn in revenue in the first year of the agreement. EBO has invested heavily in infrastructure and logistic systems over the last few years. The investment has enabled growth opportunities to be pursued, an example being the CW arrangements.

We estimate that the revenue contribution will represent 23% of the Healthcare division and 13% of the overall business and is 7.4% EPS accretive in FY20. The incumbent distributor is Sigma (SIG, not rated) and the loss of the CW contract will result in approximately a 50% downgrade to FY20 consensus forecasts.

On a more positive note the unwinding of the contract will release A$300m in working capital for SIG to invest in other acquisitions.

Changes to forecasts

We have made no changes to our FY18 and FY19 forecasts. Management has maintained its guidance for FY18 which calls for underlying EBITDA to be 10% higher than FY17.

We include the CW contract in FY20, increasing revenue by 11% to NZ$9.6bn and NPAT by 7.4% to NZ$177.6m. We have assumed the CW delivers to EBO a EBITDA margin 2.1% (a similar margin achieved by SIG).

Investment view – valuation upgrade and maintain positive stance

We use a blended DCF and PE Compco valuation methodology. Given the changes to forecasts and a roll forward of the model the revised valuation has increased (Morgans clients login to view target price). The main downside risk to the target is a slower integration of the CW business than expected.

We maintain our positive stance on EBO and an Add recommendation, with total shareholder return of 8.6%.

More information

Morgans clients can login to view our detailed report and updated share price target for Ebos Group (EBO). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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