More Analysis Neighbourly Pharmacy Inc.’s “M&A machine continues to hum,” according to National Bank Financial analyst Zachary Evershed, who is expressing increased confidence in its ability to acquire at least 40 stores per year.
“COVID fatigue has translated into a significant uptick in the number of retirements, posing a benefit to the company as talks of succession planning stocks NBLY’s M&A pipeline and affords NBLY the chance to be more selective in choosing high-quality acquisitions,” he said.
In a research report released Friday reviewing its in-line fourth-quarter 2022 results, Mr. Evershed did lowered his store growth estimate for the remainder of the year to 15 locations, down from 24 and in line with management guidance. However, he raised his forecast moving forward to 40 locations annually, up from 32, and in line with past performance.
“This is supported by Neighbourly’s $160 million in dry powder and the abundance of opportunities in the pipeline,” he said. “Given the continued uptick in inbound calls related to succession planning as pandemic fatigue has prompted a higher than usual number of retirements, we expect NBLY can afford to be more selective, resulting in generally higher quality acquisitions. While the current macro and capital market environments remain choppy and of concern to investors, management reiterated that they foresee no need for equity to fund the acquisition pipeline given available.”
Before the bell on Thursday, the Toronto-based company reported revenue for the quarter of $112.3-million, up 34.9 per cent year-over-year and largely in-line with both Mr. Evershed’s $114.1-million projection and the consensus estimate of $111.7-million. Adjusted EBITDA of $11.3-million was a rise of 1.3 per cent year-over-year and also meeting the $11.2-million expectation from both the analyst and Street.
“As expected, staffing headwinds dragged on the quarter as Omicron-related absenteeism compounded existing COVID-related pharmacist fatigue,” said Mr. Evershed. “Management foresees tight labour availability over the next 12 months, likely resulting in continued relief pharmacist costs (albeit at lower levels) as the industry awaits two graduating classes of 1,500 pharmacists each to replenish supply. Even so, wage pressures remain relatively contained across the network on the pharmacy side (80 per cent of sales), though front shop operations (20 per cent of sales) are impacted by minimum wage hikes.”
After lowering his margin forecast “modestly” to account for staffing pressure and the cut to his near-term acquisition expectation, Mr. Evershed trimmed his target for Neighbourly shares by $1 to $27, maintaining a “sector perform” rating. The average target on the Street is $35.56.
“Though we value steady organic growth with M&A upside, given the tight return to target, we rate NBLY Sector Perform,” he said.
Elsewhere, other analysts making changes include:
* Desjardins Securities’ Chris Li to $26 from $35 with a “hold” rating.
“4Q financial results were in line, partly offset by lighter script growth as new script volumes remain 15 per cent below pre-pandemic levels with COVID-19 continuing to limit in-person doctor visits,” said Mr. Li. “We continue to view NBLY as a high-quality, well-managed and defensive company with compelling long-term growth through M&A in a highly fragmented industry. However, relative valuation and limited near-term catalysts will likely keep the stock range-bound in the near term.”
* Scotia Capital’s Patricia Baker to $37 from $41 with a “sector outperform” rating.
“With the company’s very strong defensive positioning and minimal exposure to discretionary spend, coupled with a solid outlook for growth we think now is a great entry point for long term focused value investors,” said Ms. Baker. “We see NBLY well positioned to execute on its M&A strategy, drive robust growth and demonstrate ongoing operating leverage. We reiterate our Sector Outperform rating and do anticipate NBLY shares driving a significant outperformance in the back half and into 2023.”
* BMO’s Peter Sklar to $25 from $33 with a “market perform” rating.
“We continue to find Neighbourly’s pharmacy roll-up story a compelling investment thesis, as there is a significant valuation arbitrage opportunity,” he said.