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