Morningstar says accumulate Ebos, downgrades Cavalier

Wednesday 9th September 2009

A record of successful acquisitions and the recession-proof nature of medical sales make Ebos Group (EBO-NZ) a share to accumulate, says Australian equities analyst AspectHuntley, part of the Morningstar managed funds group.

However, the outlook for carpet-maker and wool processor Cavalier Corp. (CAV- NZ) is for a tough Australasian market, which pegs it back to a "hold," the firm's analysts say in a new research note on the two mid-sized New Zealand listed companies. Aspect expects Ebos to continue to "reinvent itself and make value-accretive acquisitions" to stay ahead of growing competition from distribution channels owned by multi-national "big pharma" companies, which have been subject to recent rationalisation to drive cost efficiencies.

Ebos is forecast to spend up to $7 million in the current financial year acquiring small to medium-sized firms in the health and life sciences supply chains, especially in Australia, where market growth is stronger and the medical supply industry is fragmented.

The purchase of wholesale pharmaceutical supplier PRNZ in 2007 was "instrumental in lifting EBO's return on capital to 17.6%, which is the highest it has ever been", AspectHuntley said. However, the company is said to be "greatly exposed" to "the whims and fancies" of district health boards in New Zealand.

They had a tendency to purchase erratically, and DHB spend is "by far the biggest driver of the firm's income and earnings". AspectHuntley is raising its fair value for Ebos to $6.50, up $1, and reiterates it as a stock to accumulate for its earnings outlook and medium risk appetite investors. The company's balance sheet is assessed as "very strong".Shares of Ebos gained 0.8% to $6 and have climbed 36% in the past six months.

Carpet outlook dodgy

On Cavalier, the Sydney-based analysts say the company's high exposure to New Zealand and residential markets translate into earnings heavily impacted by recession in New Zealand, although the Australian company is doing well, particularly in commercial building carpet squares.

It noted approvingly the reduction in net debt to 42%, from 50% a year earlier, after repayment of $19.2 million of debt from cashflows, and reduction of its interest in wool-scouring, where Cavalier has entered into an industry rationalisation deal with another scour owner, David Ferrier, and is less exposed to this business in the future.

However, "higher gearing is a concern, especially in an environment where credit conditions remain tight," and highlighted the need for initiatives to save $3-4 million a year to succeed as part of the continuing positive outlook for the stock.

AspectHuntley downgraded Cavalier from a ‘buy’ recommendation to ‘hold,’ but said underlying earnings for the year to June 30 being ahead of the firm's expectations.

"We are raising our FY10 estimate to $14.5 million from $13.5 million on the back of the better-than-expected FY09 result and cost savings as outlined," and a $15.4 million profit is now forecast in FY11.

"Given the significant appreciation in the stock price, valuation appears fairly priced in our view." The Australian carpet tiles business had weathered the economic storm well, being "buffered" by "longer lead times and a reasonably good order backlog".

However, broadloom carpet margins fell steeply from 14.7% a year earlier, to 9.4%, reflecting lower volumes and some discounting to stimulate demand. The wool scouring rationalisation would eventually yield close to $1 million more to the bottom line, Aspect Huntley said.

Cavalier stock was unchanged at $2.50 and has soared 117% in the past six months.

Businesswire.co.nz

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