Buy, sell, hold: Medical props

By Jenny Ruth

Monday 1st March 2004

Ebos distributes medical and surgical products and equipment to hospitals, accident and emergency clinics, pharmacies and doctor groups. It also supplies healthcare and beauty products to pharmacies, grocery outlets, physios and health stores. Offshore, it has a medical supplies distribution subsidiary in Australia, Richard Thomson, and it exports medical supplies and equipment to Papua New Guinea and the Pacific Islands.

Vital Statistics:
Ebos was founded in 1922 and after several name changes emerged as Ebos, an acronym of Early Brothers Oral Supplies, in 1986. It listed on the New Zealand Stock Exchange in 1960. Brierley Investments took a stake in 1982, selling out in 1991 to current 26.6% shareholder, Whyte Adder No. 3, deputy chairman Peter Kraus' company. Since then, the company has reinvented itself several times, buying new businesses which have offset its continuing loss of agency business. The biggest glitch was the loss of its orthopaedic products distribution business in 1996 when Johnson & Johnson took over the US-based manufacturer and decided to take direct control of distribution. Ebos had built that business from scratch since acquiring it in 1991 and it accounted for 40% of its earnings when Johnson & Johnson took it. Despite this and other setbacks, the financial results have been impressive, with net profit rising from just $642,000 in 1993 to a record $6.4 million in 2003. Current agency brands include Ansell, Difflam, Dove, Duro-Tuss, Deep Heat and Simple.

Share Price Performance:
The share price reached a record $3.50 in November before tapering off to $3.35 in early January, which, at earnings per share of 23 cents, works out at 14.6 times last year's earnings. According to market gossip, broking firm First NZ Capital has been trying to sell a large parcel of shares without success for about three months, which hasn't helped the share price.

Management:
The management team is led by managing director Mark Waller, who has held that position since 1987. As he notes in the latest annual report, operating profit has risen 21 times from $500,000 in 1998 to $11.8 million in 2003 under his stewardship.

Current Strategy:
Waller wants to lift the company's annual sales from the record $224 million in 2003 to more than $500 million in about four years time - sales have risen from $72.3 million in 1999. Much of this growth will come from acquisitions, particularly of "own brands" business. In the last year, Ebos has bought the Nature's Kiss business and its Anti-Flamme brand of herbal-based anti-inflammatory products, and the Allersearch asthma products brand and business in Australia. The company has also diversified into wholesaling since 1999 when it first began buying into Health Support, a hospital supplies and logistics business supplying the major Auckland public hospitals. It bought the final 26% of Health Support in 2002. The Auckland hospitals have always begrudged having to buy from Ebos, a hangover from Health Support's public service days, and hospitals outside of Auckland haven't wanted to buy through it because it has been seen as belonging to the Auckland hospitals. Waller says now the business is truly independent, "we're getting a lot more support. It's being seen as a benefit that it's now arms length."

Recent Track Record:
While the company's recent track record has been good with profitability at record levels, the biggest risk currently is that it may lose some of the Health Support business which has been put out to tender by the Auckland hospitals. Tenders have closed but the outcome isn't expected until late June. Nevertheless, Waller remains upbeat, rating the odds in favour of Ebos retaining its current contracts at better than 60% or 70%. "If we lost some of it, maybe we would lose the pharmaceutical side." But the margins there are very slender and the impact on earnings before interest and tax would be only in the order of $200,000. Waller argues the logistics service Ebos provides is unique and that it would take another party considerable time and money to replicate it, but acknowledges a competitor feeling predatory may be able to snaffle the business. In that case, Ebos does have contingency plans in place, he says.

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