Community pharmacies and dog food supply has been a safe haven during the pandemic, as evidenced by EBOS Group’s interim result. The company has been busy making acquisitions in the healthcare segment and should exit COVID-19 with a decent growth trajectory.
Community pharmacy revenue increased 15.2% in 1H22 with significant foot traffic due to vaccine delivery programs. TerryWhite Chemmart pharmacies (480 stores) saw revenue increase 5.6% on a like-for-like basis. Three new semi-blockbuster drugs were added to the PBS in the period which also pulled more customers through the doors.
Institutional (hospital) healthcare revenue increased 8.4% with specialty medicines and PPE among the drivers.
EBO made market share gains in Contract Logistics across Australia and New Zealand. There are plans for a new Distribution Centre in Sydney expected to open in 2023.
Healthcare total EBIT in 1H22 reached $150.7 million, an increase of 17%.
EBO made 3 acquisitions during the half year in the Institutional segment (Sentry Medical, Pioneer Medical and MD Solutions) and reached a deal to acquire LifeHealthcare for $1,167 million (a medical device distributor). The latter deal was funded with an equity raising (net $628.3 million) but excluding those proceeds, net debt to EBITDA measured up at 1.28x. The 1H22 balance sheet carried $226 million of cash.
LifeHealthcare provides some diversification with operations in Asia and hospitals in addition to its core distribution of global prostheses (spinal, orthopaedic and neurovascular surgical equipment) on behalf of about 120 manufacturers.
The Animal Care segment doesn’t often attract much attention in EBO results, but the big rise in pet numbers throughout the pandemic has worked well for the company. EBO’s key brands Black Hawk (dry dog food) and Vitapet (treats and snacks) increased revenue by 19.6% and 9.8% respectively. EBO recently commissioned a state of the art pet food manufacturing facility in Parkes that will be completed by the end of the year and sources around half of its fresh ingredients within 50km of the plant. Animal Care EBIT increased 14.9% in 1H22 with margins 30bp higher at 12.9%.
INVESTMENT VIEW
EBO has a good track record of execution on acquisitions so we would expect the additions to Healthcare to be contributing before too long. The surgery backlog in Australian hospitals should also provide some momentum.
Risks to investment view
Faster Chemist Warehouse growth and new drugs or distribution contracts could be positive catalysts for EBO earnings growth. Conversely, further COVID interruptions could slow sales growth, while the PBS or government decisions might change the distribution system for prescription drugs. Increased labour and freight charges might also reduce earnings.
Recommendation
We have lowered our recommendation from Buy to Hold after recent share price gains.
