Ageing Populations And New Distribution Centers Will Support Long Term Healthcare And Animal Care Demand

Catalysts

About EBOS Group

EBOS Group is a diversified healthcare and animal care distributor and brand owner operating across Australia, New Zealand and Southeast Asia.

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

• Rollout and commissioning of 8 new healthcare distribution centers through FY '26, including expanded automation and refrigeration, are expected to support higher throughput and a lower cost to serve, which can support EBITDA margins and cash generation.
• Rising use of high-value medicines such as GLP-1s and oncology drugs, supported by increased refrigeration capacity in Australia and New Zealand, positions EBOS to capture higher dollar revenue growth in Community Pharmacy and Institutional Healthcare, even if percentage margins are slimmer. This can lift total gross operating revenue and EBITDA.
• Ageing populations and increased health spending through hospitals and community pharmacies, combined with EBOS' strengthened positions in oncology, medical technology and Symbion Hospital, point to ongoing demand that can support divisional revenue and earnings.
• Growth in pet ownership over time and the shift toward higher quality pet nutrition are supportive for EBOS' Black Hawk, VitaPet and other pet brands. Recent acquisitions such as SVS and Next Generation Pet Foods widen the product and channel mix, which can support Animal Care revenue and segment EBITDA.
• Ongoing new customer wins in pharmacy wholesale, a larger TerryWhite Chemmart network, strong digital engagement through the MyTWC app and increased CSO funding are expected to deepen EBOS' role in pharmacy supply, which can benefit healthcare revenue, gross operating revenue and earnings per share.

Assumptions

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

• The bullish analysts are assuming EBOS Group's revenue will grow by 8.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.8% today to 2.5% in 3 years time.
• The bullish analysts expect earnings to reach A$382.9 million (and earnings per share of A$1.89) by about January 2029, up from A$215.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$283.1 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 26.3x on those 2029 earnings, up from 21.3x today. This future PE is greater than the current PE for the NZ Healthcare industry at 14.9x.
• The bullish 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?

• High-value medicines such as GLP-1s and oncology products are growing as a share of volumes. EBOS earns slim percentage margins on these; for example, an oncology drug sold at about $3,700 with roughly a 1.5% margin. If the mix continues to skew to such products without offsetting efficiencies, Community Pharmacy and Institutional Healthcare GOR margins and EBITDA margins could remain under pressure, limiting earnings growth.
• The wholesale pharmacy market is described as highly competitive following the loss of the Chemist Warehouse Australia contract and the largest retailer backward integrating into wholesale. Management expects tighter margins in pharmacy wholesale to continue through FY '26. If price competition persists for longer than expected, revenue quality, EBITDA margins and ultimately earnings per share could be constrained.
• Animal Care is already seeing cost of living pressures leading consumers to delay or downgrade pet purchases and trade down within pet nutrition, and puppy cohort growth in Australia has flattened. If this softer discretionary pet spending becomes a longer-term pattern, Animal Care revenue growth, segment EBITDA and group earnings diversification could all be weaker than hoped.
• The distribution center renewal program involves about $360 million of capital with higher depreciation and lease interest costs, and management expects net finance costs of about $110 million to $120 million in FY '26 mostly from leases. If productivity gains and volume benefits from the 8 new DCs take longer to materialize, the higher fixed cost base could weigh on net margins and returns on capital.
• Hospital capital expenditure in Southeast Asia and Australia is described as softening, vaccine activity is normalizing post COVID, and some New Zealand COVID era logistics programs are ramping down. If hospital and government related demand remains subdued for an extended period, Institutional Healthcare and Contract Logistics revenue growth, GOR and EBITDA could be weaker than the bullish earnings expectations assume.

Valuation

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

• The assumed bullish price target for EBOS Group is NZ$41.16, which represents up to two standard deviations above the consensus price target of NZ$35.02. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$41.16, and the most bearish reporting a price target of just NZ$22.83.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be A$15.6 billion, earnings will come to A$382.9 million, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of NZ$26.0, the analyst price target of NZ$41.16 is 36.8% higher.
  
• 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.