Often EBO is thinly traded.Over the last few months there have been more buyers than sellers.The announcement contained statements that would have caused concern,so there are now more sellers than buyers.
Those statements;"particularly against a background of ongoing reform and tight budgets in public heathcare and a difficult economic enviroment."
In Australia " "real" economy is finding the going tough."
As a person who has invested in EBO for over 20 years these statements are not new,and EBO has always been able to take advantage of fast changing markets.For years people have said EBO will find it difficult if they loose this agency or that agency, hospital boards will go direct to the manufacturer,Australians will not deal with New Zealanders,they are too reliant on orthopedic business,loss of dental business will affect the whole business,the currency is working against them,dealing with supermarkets is madness etc.However EBO has gone from a $2m capital company to what it is today.I suppose I get in divie a year what my original shares cost.
I have read the announcement and to-days article in "The Press" and know from experience Mark Waller delivers on what he says he will do.
Percy, Forsyth Barr continue to say "accumulate" and value at $7.10, with the caveat that they have not been able to get a read on the Masterpet acquisition. I guess it's all upside when they do see the Masterpet profits flow through. I agree with you its a great distribution company. I just thought it a little fully valued, you are correct that they have good management, and if you are getting in dividends what your shares originally cost you, then you prove the theory about value investors winning over time.
Over the years I have noted when EBO's PE gets above 15 you know share price is getting high.When PE drops below 13 seems to be getting undervalued.
Your market cap does not grow from $2 or $2.5mil to over $350 mil in just over 20years unless you have a record of success.EBO has this record.
ebos has been a great company for dividend growth,there are not many better, sparkytheclown I would be interested to know who you think long term offers better capital gain?
I hold both Ryman and Abano,however I have recently sold Nuplex after holding for a number of years. I liked the old MD John Hurst,but not sure whether the new guy's actions can match his talk.So happy to watch NPX from the sidelines.
I like the acquisition, but it looks to me like it may make it more of a 2013 story. i.e. wait for a full year of impact and for costs (and associated debt) to become clearer.
I have value at $7 for now though, so it looks like okay buying at these prices ($6.55). However, longer term downtrend doesn't look exactly shattered at this point on latest acquisition news, so maybe wait and see.
I'm sticking with this view on being a 2013 story for now. Also sticking with $7 valuation and prefer waiting for next report before considering buying.
Given the $20m EBITDA forecast provided was for FY 2013, there remains the possibility that it is dependent on some degree of integration/savings. Therefore a reasonable chance the next result could leave some question marks - firstly over whether they will achieve the Masterpet/Animates forecast and perhaps secondly, around the continuing contribution from healthcare (since it seems to be entering a weaker phase).
Signalled further acquisitions are probably not a positive this half, as would imply further increases in debt against a risk of EBIT weakness in the period. For now, the value of debt is not concerning, but knocks a couple of $'s off the s.p. if investors start worrying they have over-reached.
For whats it worth a bit of a report I wrote to the trustee and investment manager of my family trust -
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EBO has been a solid performer for many years
Mainly through acquisitions it has grown EBIT from $6m in 2003 to $23m in 2011 and heading for $30m this year
In that time shareholder funds have increased from $45m to $200m (there has been a couple of capital raisings)
EBO is one of the few companies in NZ who consistently earns more than it cost of capital - ie makes an economic profit on the total invested (equity and debt) capital in the company. Since 2003 EBO has averaged about $4m pa of economic profit
Real analysts don't care too much about earnings multiples etc. They get to the guts of the business and assess its real value from how much economic profit it makes and what that means in value terms. A common measure is Market Value Added (market cap less equity) which is how much value the market has added to shareholders funds. This MVA is the present value of all future economic profit flows
At the moment EBO market cap is about $360m, therefore the MVA of EBO is about $160m (bloody fantastic)
As EBO has grown it has needed more and more capital (both debt and shareholder funds). Since 2003 total invested capital has increased from $54m to $256m at June 2011 and with the new debt heading towards $350m by June 2012.
This increasing capital has driven increasing profits (bit of struggle the last year or so) but has not driven increased economic profit (ie a declining ROIC). ROIC in 2011 ws just under 10% - which is greater than the 8.6% cost of capital that PWC calculate. Economic Profit in 2011 was ~$2m. A generous forecast for this year including Masterpet for 6 months is say $3m. Slightly below the recent average but about where EBO economic profit has been over the last 8 years
Remember MVA is the present value of future economic profit streams - in EBO case this is about $40m which gives an implied market cap of $240m (current $360m)a
Without getting too detailed in the maths one way of looking at it is taking the MVA at any particular time as a multiple of the Economic Profit (EP) at that time. For EBO a multiple of 14 (based on its cost of capital) seems appropriate.
The chart attached shows EBO share price over the years with the EP multiples noted.
To get excessive long term returns one needs to buy when shares are 'undervalued' - makes sense eh. Through to 2007 EBO was 'fairly' valued and the share price increased as economic profits increased - over that time EBO was increasing EP nicely because they were making heaps more profit on less than heaps more capital.
Total capital increased significantly in 2007 and since then profits have grown but less than the rate that capital requirements have (although more than covering that cost of capital). This has seen that EP multiplier increase substantially - implying EBO is significantly 'over valued' at the moment
See the EP multiplier dropped to 7 when the shareprice collapsed (and its MVA) because of the GFC - that was the time to buy to make excessive long term returns - EBO was 'cheap"
In summary the current shareprice of EBO has an enormous amount of growth built into it - even before the market knew about Masterpet. On current and projected performance its MVA (and thus its market cap) is about $100m too much which implies a realistic value of $5 odd
All that implied growth may eventuate but bear in mind that the market has never had such growth built in the shareprice in the past. Today is not a good time to buy EBO shares if one wants excessive / above average long term returns - even if you a true believer
EBO will no doubt continue to perform well and grow its reported bottom line and continue to earn more than its cost of capital and eventually the market will settle on a price which really reflects the economics of EBO's business but I think that future price will bring long term returns we are after
Thank you winner69 and Lizard for your well thought out,and wise posts.
I must admit I have always got EBO selling a bit wrong.It has been my largest holding for awhile now,and every time I have sold off a few it has gone up.!!!!! Now scared to sell off any more.!!!!
(Great report - makes me realise how much I still have to learn!)
No cash .... funny we always seem to be on the same wavelength and never seem to disagree or argue .... except as a trustee he likes to file so he can check back on the decision making process etc .... in this case the recommendation was to wait until there was more value in EBO so we need to review it every so often .... it is hard talking to myself at times though
ANother EBO chart from the report is quite interesting - investment (equity + Debt) v economic profit ..... note the investment is the avergae over the year so it esentially shows only a half year of the new debt .... and thus heading to the top of the page if they don't pay some back. Chart sort of says EBO not really creating riches from their acquisitions
The PNZ acqusition was high volume low margin business.
It will be most important that future aqusitions are higher margins.
I see EBO have the distribution channels to add more profitable add ons to both human and animal health businesses.
When looking forward one must judge the company's history of success.EBO passes this test.
"You are better to pay a fair price for a good business they a good price for a fair business."
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Originally Posted by SparkyTheClown
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