Ebos Group secures major supply contract
EBOS Group has been upgraded to buy by Craigs Investment Partners after the company won the tender to act as the exclusive third party distributor for pharmaceutical products.
The contract means supplying more than 400 Chemist Warehouse and My Chemist stores in Australia.
Both parties expected to enter into a fiveyear supply agreement to take effect from July 1 next year, with the potential for an extension for a further three years.
Craigs broker Chris Timms said Ebos would be the dominant, scale player in the Australian wholesale pharmacy industry, giving it a sustainable cost advantage over rivals.
Earnings per share growth would accelerate to the 2020 financial year.
‘‘We think growth of Ebos’ core pharmacy segment will improve long term as Chemist Warehouse gains market share.’’
Ebos’ capital expenditure cycle had peaked, and increased cash flow from 2019 would allow the repayment of debt and fund merger and acquisitions, he said.
The deal was estimated to provide an attractive return on capital and valuation. Ebos shares were trading below the revised $22 target price. Ebos shares last traded at $20.80, up 10c.
Ebos had a track record of discip lined capital allocation, Mr Timms said.
‘‘It has steadily diversified its income streams away from the core pharmacy wholesale business over time — first to hospital drug wholesaling and more recently into animal care, contract logistics and consumer brands.’’
The result was that the core pharmacy wholesale business accounted for about 45% of the operating profit, and other segments the remaining 55%.
Pharmacy would increase following the Chemist Warehouse contract win, he said.
The other segments, including hospital pharmacy (25%), animal care (21%), contract logistics (6%) and consumer brands (5%) had delivered stronger organic growth than community pharmacy in the past two years, as the latter had been affected by consistent price cuts for generic drugs.
The company’s diversification reduced — but did not eliminate — its exposure to Australian Federal Government funding changes in any one area of its business.
The greatest regulatory threat to the business of Ebos was not price cuts, although those would likely continue to restrain growth in the earnings of the pharmacy sector.
Instead it was likely to be the fiveyearly Community Pharmacy Agreement negotiated between pharmacists and the Government. It also set out key terms for remuneration of wholesales, including markup and subsidies. The CPA was not due to be negotiated until 2020, Mr Timms said.
Chemist Warehouse was a deep discount pharmacy chain that had been growing significantly faster than the retail industry as a whole. It was now the largest single chain in the market, with about a 23% share of both pharmacy drugs and overthecounter products such as vitamins and infant formula.