Australia | 3:26 PM
New research on the Pharmaceutical Wholesaling sector identifies three stocks with long-term defensive growth within an improving government funding framework.
-First-time research on three pharmaceutical wholesaling stocks
-Each seen providing exposure to long-term defensive growth
-Ebos Group and Sigma Healthcare impacted by Chemist Warehouse
-Transformative merger for Paragon Care
By Mark Woodruff
In a market worth more than $15bn per year, the Pharmaceutical Wholesaling sector on the ASX includes three stocks uniquely positioned in terms of growth and value, according to new research by Ord Minnett. While very different opportunities, each company is considered providing long-term defensive growth within an improving funding framework.
Offering an attractive entry point into one of the highest quality operators in the sector, after a more than -30% share price decline since March, Ebos Group ((EBO)) warrants a Buy rating from the broker.
Sigma Healthcare ((SIG)) receives an Accumulate rating (one notch below Buy) as the business screens positively versus peers on a growth-adjusted basis, while Paragon Care ((PGC)) is also rated Accumulate following a share price rally of more than 100% since a merger announcement in March.
Collectively, these companies account for around 72% of the pharmaceutical wholesale market.
Ord Minnett's Buy rating for Ebos Group is complemented by recent rating upgrades by Citi and Jarden.
Earlier this month, Citi upgraded to Neutral from Sell noting the stock price had underperformed compared to the 3% Healthcare sector outperformance against the ASX200 since the beginning of March.
The broker attributed this weaker showing to the unwinding of the Chemist Warehouse contract (potentially secured by Sigma Healthcare), along with recent removal from the Morgan Stanley Capital International (MSCI) index.
At upcoming FY24 results, the analysts will be focusing on the Chemist Warehouse-related impact on revenue and earnings in FY25, the Community pharmacy market growth rate ex-Chemist Warehouse, and further detail on targeted cost efficiencies of between $25-50m in FY25/26.
In an uncertain macro-economic environment, Citi will also be monitoring management's animal care growth expectations.
Ebos Group is a leading wholesaler, distributor, and marketer of not only animal care goods, but also pharmaceutical and healthcare products in the APAC region. Revenue is split 80/20 between Australia and New Zealand, and the Healthcare segment generates 84% of group earnings.
Understanding and benchmarking performance to system growth is vital to Jarden's investment thesis for Ebos Group.
Excluding the Chemist Warehouse contract, this broker points out Australian revenue within Healthcare over FY14-23 increased at an 8% compound annual growth rate (CAGR), compared to the PBS expenditure CAGR of 6%.
In late April, Jarden upgraded its rating for the group to Overweight from Neutral on stronger valuation support and greater confidence in forecasts for Pharmaceutical Benefits Scheme (PBS) core system support (which subsidises prescription medicines).
The analysts review of this PBS support, which underpins the group's main revenue engines in Australian Community Pharmacy and Institutional Healthcare, provided the broker with more confidence management should be able to re-build from FY25 following the loss of Chemist Warehouse.
Certainly, Ord Minnett expects Ebos to emerge from the Chemist Warehouse contract exit as a higher quality, more diversified business.
An investment in the group not only provides investors with exposure to well-established growth strategies across defensive markets such as Community Pharmacy and Institutional Healthcare, highlight the analysts, but also a best-in-class capital allocation track-record.
The broker explains management has made more than 20 acquisitions over the last decade, with an average 16.5% return of capital employed (ROCE).
Ord Minnett has set an initial $33.50 12-month target price for Ebos Group, which raises the average target in the FNArena Database to $36.38, given the broker's prior whitelabeled research from Morningstar had a $28.50 target (Hold).
This new average target of five covering brokers suggests just under 17% upside to the latest share price. There are now four Buys (or equivalent) and one Neutral rating by Citi.
Outside of daily monitoring, Jarden is Overweight with a NZ$37 price target.
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