Neighbourly Pharmacy Inc T.NBLY

RBC

[retiredcf]

Their upside scenario target is $50.00. GLTA

Neighbourly Pharmacy Inc.

The right Rx - Growth and defensiveness at a reasonable price

Our view: We believe current price/valuation represents an excellent opportunity to establish/expand a position in one of the most defensive, high growth names in the Canadian consumer sector. NBLY has i) an unparalleled position as consolidator of choice in, ii) a defensive industry that iii) benefits from long-term secular growth trends in the form of favourable demographics and the ongoing expansion of pharmacy services. Reiterating constructive view, $42 PT unchanged.

Key points:

Estimates largely unchanged ahead of FQ4 to be reported on June 23, at which point FQ1 will have already ended. Consequently, expecting investors to look past any strength/weakness relative to quarterly street estimates for FQ4 and instead focus on forward-looking commentary. Forecasting EBITDA $11.2MM, consensus $11.7MM [range 10.6-12.8MM]; We had already moderated our expectations around FQ4 to reflect lingering impact of Omicron-related absenteeism. We reiterate our constructive view given:

• Defensiveness of NBLY's organic growth profile i) Stability of demand: ~80% of NBLY's revenues are derived from Rx, mostly non-discretionary, and volume of Rx benefits from demographic-driven long-term secular growth of an aging Canadian population. We also note ~90% coverage levels in Canada from either public or private plans; ii) Secular growth in high margin services business: Expanded scope of service for pharmacists is increasingly acting as a release valve for the healthcare system. Any potential regulatory headwinds likely to be offset by increased revenue from incremental services.

• Extended M&A growth runway: NBLY is well positioned to execute on the significant consolidation opportunity in the Canadian independent pharmacy space.

• Rubicon transaction a key "de-risking" event that: i) folds in a notable M&A competitor, ii) adds significant scale in under-penetrated markets, and iii) brings NBLY closer to the critical mass at which strategic opportunities emerge. Further details on the transaction and its strategic merits here.

• Favorable medium term setup, with above-average: i) SSS due to normalizing physician visits/elective surgeries and, unfortunately, the consequences of undiagnosed illnesses during the two-year COVID period; ii) M&A activity on the multi-store chain front given the age profile of most owners.

• Valuation update: With the stock down ~35% from its highs and no change to the fundamental outlook, NBLY is now trading close to IPO

  RBC Capital Markets is acting as financial advisor to Neighbourly Pharmacy Inc. in respect of a definitive agreement to acquire a network of retail pharmacies known as Rubicon Pharmacies, as announced in the press on March 10, 2022.

Outperform