Neighbourly Pharmacy Inc.
Crisp lab coats: Solid and in-line FQ4, constructive outlook and attractive valuation
Our view: Buoyant M&A backdrop and appetite augmented by financial/ operating/managerial scale of Rubicon acquisition position NBLY extremely well to deliver >50% three-year EBITDA CAGR to F24E, well ahead of the +30% we forecasted at the time of the IPO. With valuation nearing IPO range (Exhibit 7), we reiterate our constructive outlook for this defensive, growth-oriented story augmented by a protracted demographic shift in favour of demand for Rx and pharmacy services.
Key points:
With Rubicon set to close on June 27, NBLY is on the threshold of a step- change in scale and scope of operations (Exhibit 1). In our view, Rubicon is 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.
High conviction around sustainability of M&A pace. NBLY added 41 stores in 2022, ahead of initial company guidance +35 at the IPO. Our F23 store forecast +110 incudes 100 from Rubicon and three closed so far in F23, with upside relative to F23 company target +15 ex-Rubicon. Management noted an uptick in succession planning conversations over the past six months as pandemic fatigue takes hold. With an addressable pipeline of 3,500 potential acquisition targets (ex-Rubicon), management is highly confident in its ability to continue with the pace of 40 stores/year, with upside should larger networks come to market. Company focus squarely on maintaining an aggressive growth tack, resulting in more gradual Rubicon- related deleveraging than FCF conversion would otherwise indicate.
Back to Q4/F22: solid, as forecast and supportive of our constructive view. Both revenue and EBITDA as forecast (Exhibit 8), with EBITDA impacted by: i) Omicron and related costs associated with elevated absenteeism; ii) heightened vaccinations and booster shots that drove elevated labour costs; iii) depressed Rx volumes as Omicron negatively impacted non-COVID-related health care visits/procedures; and iv) year- end cost adjustments. It should be noted that some Street estimates, notably those aggregated by Bloomberg, were incorrect heading into the quarter, resulting in some confusion around consensus.
Strong argument for multiple expansion underpinned by favourable M&A backdrop and demographic trends, ongoing expansion of pharmacy services, and the positive effect of scaling and valuation arbitrage on shareholder returns. NBLY is trading at 11.2x our C23E EBITDA, roughly consistent with PLC (10.6x) and a discount to DOL (15.7x) (Exhibit 6). With the stock down ~40% from its highs and no change to the fundamental outlook, NBLY is now trading close to its IPO valuation (14x vs 12.9x PF LTM EBITDA @ IPO) (Exhibit 7).