Morningstar | Ebos Takes Care of Debt After Acquisition Streak
We maintain our AUD 20.00 (NZD 21.00) fair value estimate for Ebos, following the group's fully underwritten NZD 150 million share placement. We calculate the issue to be merely 2% EPS-dilutive on a pro-forma basis, with the 5% increase in the share base partly offset by lower forecast interest charge from the reduced debt. Shares in Ebos were trading broadly in line with our fair value estimate before the capital raising announcement.Issue of the new shares at NZD 19.70 each, just 6% below our intrinsic assessment, is a sensible capital management initiative. Since fiscal 2014, Ebos has outlaid more than AUD 460 million on acquisitions and investments, including Black Hawk (pet foods), Red Seal (health products), Terry White (chemist group) and Warner & Webster (medical and surgical supplies wholesaler). These acquisitions were made mainly in a bid to offset persistent margin pressures from Pharmaceutical Benefits Scheme reforms on its Community Pharmacy business (still over 50% of group revenue).
This strategy has boosted group EBITDA to an estimated AUD 260 million in fiscal 2019 from AUD 160 million in fiscal 2014, while return on capital employed has increased to around 16% from 13%. However, net debt/EBITDA has also ballooned to 2.2 by the end of December 2018 from 1.8 in fiscal 2014, ending the period with a net debt load of AUD 552 million.
This capital raising reduces that leverage to 1.6, thereby, bringing it right down to even below the low-end of management's 1.7 to 2.3 target range. The conservatism is warranted given the estimated AUD 100 million inventory build-up ahead of taking on the massive Chemist Warehouse Group contract from July 2019. Furthermore, the financial flexibility allows the narrow moat-rated group to continue scouring the market for diversification opportunities, especially in the higher-margin Animal Care space where Ebos has enjoyed an EBITDA CAGR of over 14% since fiscal 2014.
EBOS Group is a provider of medical and healthcare products to the human and animal markets. Co. operates in two business segments, being Healthcare, which incorporates the sale of healthcare products in a range of sectors, own brands, retail healthcare, wholesale activities, and logistics; as well as Animal Care, which incorporates the sale of animal care products in a range of sectors, own brands, retail and wholesale activities. Co.'s operations are primarily in New Zealand and Australia.
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