What does EBOS do?
EBOS listed on the NZX back in 1960 as a small player in the New Zealand healthcare industry. Today EBOS is the largest wholesaler and distributor of healthcare products across Australia and New Zealand. It has achieved this through a combination of organic growth and large acquisitions. EBOS is also a large distributor of animal care products and the owner of several premium pet food brands. Just over 80% of earnings comes from healthcare while 20% comes from animal care.
Over the past 20 years EBOS has delivered an impressive shareholder return of 19.8% p.a.
EBOS has been a core holding across several Milford funds since 2012 and we increased our shareholding in 2020 following a sell-down by a major shareholder. Our view at the time was that the market was underappreciating the defensiveness of EBOS’s earnings as well as their growth runway.
Why do we own EBOS?
Strong competitive position. EBOS is the market leader in most of their markets. In Australia EBOS are the largest distributor of pharmaceutical and healthcare products to pharmacies and hospitals. We estimate they have a 40% share of the pharmacy market, and 60% share of the hospital market. EBOS have also made significant investments in building the largest and most efficient healthcare distribution network across both Australia and New Zealand. Scale and higher levels of automation provides EBOS with a cost advantage when compared to their competitors. This allows them to earn better margins and generate higher returns on capital, in addition to offering a more reliable service to customers.
In healthcare distribution there are also very high barriers to entry due to both regulation and scale requirements.
Defensive sectors with solid growth outlook.
Healthcare expenditure continues to grow driven by a growing and ageing population, while animal care expenditure has been growing strongly due to both an increasing pet population and humanisation of pets (a growing trend where owners treat their pets like children). Spending on pets grew very well over the past year as working from home saw a rise in pet adoption and how much we spend on our pets. Both sectors provide resilient and stable growth throughout economic cycles. Within these markets EBOS has also continued to gain market share which we expect will continue.
Both EBOS’s strong competitive position and the underlying trends in these sectors have seen EBOS deliver consistent financial performance. EBOS has grown underlying earnings per share at a 10.6% compound annual growth rate since 2014.
The defensive nature of EBOS’s products and services also meant that during 2021 EBOS achieved another record year with 14.0% earnings growth despite the Covid-19 pandemic.
Disciplined capital allocation
EBOS has a solid track record of creating shareholder value through accretive acquisition. This has included several transformative acquisitions since listing, such as the purchase of Symbion in 2013 for $1.1bn. At the time, Symbion was the largest healthcare distributor and wholesaler in Australia, and the acquisition forms the core of the Australian business EBOS has today. Subsequent acquisitions have been smaller bolt-ons in existing or similar markets.
When making acquisitions or investments, EBOS adheres to a disciplined investment framework and requires investments to achieve a return on cash employed (ROCE) of at least 15%. EBOS has consistently achieved this, with a ROCE of 18.0% in 2021.
Consistent growth over the years and resilience during Covid-19 has seen both future earnings expectations, and the multiple investors will pay for those earnings, rise. This has driven an increase in EBOS’s share price from $24 at the start of 2020 to $35 today.
EBOS is in a strong competitive position and well placed to continue to grow earnings over the long term. They also have a solid balance sheet with plenty of capacity for further investments or acquisitions that will deliver value to shareholders.