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| From: | "Chris Castle" <c.castle@paradise.net.nz> |
| Date: | Thu, 25 Oct 2001 14:27:27 +1300 |
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Gerry -
It might be a bit out of date but I include below
my views included in a Sunday Star Times column I wrote about the company in
early September
The comment this week about further acquisitions is
a two edged sword methinks.
Regards,
Chris Castle
Ebos – does growth have a cost? Twenty years ago Ebos Group (then Ebos Dental & Surgical Supplies) was a very small Christchurch based listed company – about the same size as long forgotten South Island listed corporates as Alloy Steel, Ashby Bergh, Beath & Co, M O’Brien, and Trans - Ashburton. As such it was a stock followed by only a few, primarily Canterbury based investors.
Ebos, now a marketer of medical consumable products, is still a company that not many investors know much about. But the difference now is that after explosive growth during the last few years the company is now quite substantial, capitalised at $79 million, 30 times larger than it was in the early 80s. Sales revenue for the year to 30 June 2001 was over $107m (up from $81m last year) and the bottom line result after tax was a record $5.2 million. This result seems to have taken the market by surprise, as the share price has moved up by 19% since the result was announced two weeks ago. This recovery should have cheered up investors who have paid prices as high as $3.90 in August last year. Since then the market price had retreated 37% to $2.45, mainly due to the disappointing year 2000 result, which although matching the previous year was significantly lower in terms of the return on funds invested (down from 24% to 14%). Clearly until this result was announced investors had anticipated that earnings would continue to grow rapidly as the company’s asset base expanded. They had priced the stock accordingly. At the present market price the company is trading at 15 times earnings, not really a bargain if profits were to continue at present levels. So presumably, once again, investors are factoring in further ongoing profit increases, an expectation fuelled to some extent by the directors’ statement in the recent announcement that “we are evaluating a number of exciting new growth prospects - both in Australia and New Zealand.”. It is to be hoped that these growth prospects, if they are acquired, make a sufficiently positive contribution to the bottom line. It appears that this hasn’t always been the case in respect of recent acquisitions. Ebos has grown rapidly since 1996 primarily by buying other companies. Acquisitions have included Richard Thomson & Co, a Sydney based medical wholesaler, a 50% holding in Auckland company Health Support Ltd, Queensland based Maygar Medical and medical sales and marketing company Medic Corporation. Interestingly, Medic was acquired from Rangatira Limited, the venerable and reclusive Wellington based investment company. Rangatira became a major Ebos shareholder as the Ebos acquisition was funded by means of a share placement. Ebos has also grown generically by establishing a rehabilitation/mobility division and setting up an export business. As a consequence of all this activity, Ebos group assets, $14m in 1996, were $56 million by June 2000. Earnings also grew significantly during the period, but not to the same extent. The return on funds invested was a notable 39% in 1996, averaged 22% for the next 3 years and fell to 14% in the year to 30 June 2000. The recent preliminary result did not disclose total funds employed so the 2001 equivalent figure cannot be calculated precisely until the release of the annual report. However, assuming no major balance sheet changes have occurred, the return on investment should be about 15% but could well be lower than this if total funds employed have increased further during the year. This analysis, while admittedly somewhat simplistic, displays a disturbing trend – as the company grows it seems that it is becoming less profitable. In that context the suggestion that further acquisitions are contemplated isn’t necessarily a valid reason for an Ebos shareholder to be full of the joys of spring. A more positive scenario could see the company achieving (once again) future returns of 20% plus on an expanded asset base. In these circumstances earnings per share would be markedly higher than at present. However, the relatively poor 2000 result was ascribed to difficulties in recovering cost increases and to unfavourable currency movements, both structural factors to which the company may still be exposed. Still, it’s remarkable that Ebos still survives and operates successfully pretty much in the same industry as it did in the early 1980s. As noted earlier, similar companies of that era have been absorbed into larger companies or have simply disappeared. Ebos has seen its share of the action – Brierley Investments built up a major holding and took effective control of the company during the mid 1980s. The controlling interest was subsequently acquired by ex BIL executive Ross Martin (now Asia Pacific executive chairman of Stagecoach) who eventually on-sold it to current major shareholder and director Peter Kraus. Disclosure: No shares held E-mail: c.castle@paradise.net.nz
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