Future Mix Shift Toward High Value Medicines Will Pressure Margins And Earnings

Catalysts

About EBOS Group

EBOS Group is a diversified healthcare and animal care company operating across pharmacy wholesale, institutional healthcare, medical technology, contract logistics and branded pet products in Australia, New Zealand and Southeast Asia.

What are the underlying business or industry changes driving this perspective?

• Ongoing mix shift toward high value medicines such as GLP-1s and oncology products carries low percentage margins. If volume growth continues to skew toward these categories without offsetting efficiency gains, group GOR and EBITDA margins could compress further and weigh on earnings growth.
• The pharmacy wholesale market remains highly competitive after the Chemist Warehouse Australia transition. Any prolonged price pressure as wholesalers chase share and absorb spare capacity could cap GOR growth and limit EBITDA progress despite solid top line trends.
• The multi year distribution center renewal program increases fixed lease and depreciation costs. If volumes or productivity benefits lag management expectations, higher cost to serve could drag on net margins and reduce the contribution of the program to future earnings.
• Animal Care is exposed to consumer discretionary pressure and a flattening puppy cohort. If cost of living strains persist or worsen, further trading down and delayed pet ownership could slow branded revenue growth and dilute segment EBITDA margins, even with share gains.
• Softer hospital capital expenditure and normalization of vaccine activity, particularly in Southeast Asia, mean Medical Technology and Institutional Healthcare may see slower revenue growth. If this coincides with higher financing and D&A from recent acquisitions, it could constrain ROCE and EPS progression.

Assumptions

This narrative explores a more pessimistic perspective on EBOS Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming EBOS Group's revenue will grow by 5.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.8% today to 2.0% in 3 years time.
• The bearish analysts expect earnings to reach A$282.0 million (and earnings per share of A$1.56) by about January 2029, up from A$215.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$381.4 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.6x on those 2029 earnings, down from 21.9x today. This future PE is greater than the current PE for the NZ Healthcare industry at 14.9x.
• The bearish analysts expect the number of shares outstanding to grow by 4.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.1%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• EBOS is reporting solid organic growth, with FY '25 underlying revenue of A$12.3b and underlying EBITDA of A$585m, supported by new pharmacy wholesale customers and acquisitions. If this multi segment growth continues, it could support higher revenue and earnings than a bearish view allows for.
• The long term distribution center renewal program is already adding capacity, automation and refrigeration. Management expects productivity benefits over the next 10 to 15 years, so if these assets lift efficiency and lower the cost to serve, group net margins and cash generation could be stronger than expected.
• Healthcare and Animal Care are both benefiting from structural tailwinds such as rising healthcare spend, demand for high value medicines like GLP 1s and oncology products, and premium pet nutrition. If these tailwinds are sustained, they could underpin steady segment revenue growth and support EBITDA and earnings resilience.
• EBOS continues to pursue bolt on acquisitions in medical technology and animal care, with management expecting these deals to be immediately EPS accretive and to support ROCE expansion in the short to medium term. Successful integration and further deals could lift earnings and returns on capital above pessimistic expectations.
• Despite macro pressures and the loss of the Chemist Warehouse Australia contract, EBOS has maintained an underlying dividend of NZ$1.185 per share and kept leverage at 1.9x. This suggests financial flexibility and a focus on shareholder returns that, if maintained, could support investor confidence and put a floor under the share price through earnings, cash flow and dividend support.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for EBOS Group is NZ$23.77, which represents up to two standard deviations below the consensus price target of NZ$35.38. This valuation is based on what can be assumed as the expectations of EBOS Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$41.42, and the most bearish reporting a price target of just NZ$22.97.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be A$14.3 billion, earnings will come to A$282.0 million, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of NZ$26.67, the analyst price target of NZ$23.77 is 12.2% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.