Ebos Group: Quality company continues to buy
About the author:
- Author name:
- By Scott Power
- Job title:
- Senior Analyst
- Date posted:
- 03 September 2021, 9:00 AM
- Sectors Covered:
- Healthcare, Life Sciences
- Ebos Group (ASX:EBO) has added to its medical consumables portfolio, with the well flagged acquisition of a medical consumables business.
- EBO continues to deliver sustainable growth with all financial metrics at or above expectations (over the last eight years average ROCE >15%, EPS growth averaging >10%, and dividend growth averaging >11%).
- Although we have made no changes to our near-term forecast we have increased our long term growth rate which sees our valuation move up to (login to view).
- Given the recent strength in the share price we move back to a Hold (from Add) looking for a better entry point into this quality name.
As eluded to in the FY21 results, EBO has now announced the acquisition of Sentry Medical, a designer, marketer and distributor of medical consumables.
This acquisition provides further expansion in the distribution of medical consumables for EBO’s Institutional Healthcare Division and supports EBO’s acquisitive strategy for growth. It also has the potential to drive further sales growth and margin expansion.
EBO has a strong balance sheet with net debt to EBITDA ratio of 0.85x and further capacity for acquisitions and capital investment.
EBO aims to achieve market share of #1 or #2 in its key areas of focus. EBO has flagged increasing its exposure to the medical device space with recent acquisitions in the orthopedic and aesthetic sector generating revenue of ~$70m.
Management estimate the division currently is the fourth largest player, so clearly there is an opportunity to grow. The acquisition of Sentry Medical adds to its market presence in the medical consumables segment which EBO classify as Institutional Health.
EBO continues to see strength in their growing key brands, Black Hawk and Vitapet. They recently announced they will build a new pet food manufacturing facility in Parkes in NSW. This will bring manufacturing inhouse and reduce third-party and other supply chain costs.
The cost of the capital investment is ~A$80m and production is planned to commence late CY22.
Forecast and valuation update
We have made no changes to forecasts for FY22/23/24 respectively. We sit broadly in line with consensus (Bloomberg) with NPAT at A$204m/A$220.9m/A$283.3m for FY22/23/24 respectively.
We use a combined DCF/PE Compco (PE 25x) valuation methodology. We have moved our DCF valuation to A$34.86 (from A$30.50), which reflects a higher long term growth rate of 11% (was 10%) and a lower wacc of 7.0% (7.3%).
This results in a higher valuation of (login to view). We have set our target price at the same level.
Given the strong share price performance we now move back to Hold (from Add). We will look for a better entry point closer to A$31.00 into this quality name.
Further bolt-on acquisitions with a particular focus in Institutional healthcare.
Performance update at AGM in October 2021.
The key downside risk is extended disruptions caused by COVID issues creating supply chain issues, as well as impact of recent lockdowns in NSW and VIC.
The key upside risk is a worse flu season creating increased demand through the pharmacy channel.
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