Neighbourly Pharmacy Inc.
(NBLY-T) C$23.95
Adjusting Margins on Potentially Longer Labour Challenges Event
We lowered our EBITDA estimates by 4% to 5% through our forecast horizon
mostly to reflect the ongoing labour challenges that we expect to continue to linger into the next calendar year. We are also modelling a modestly lower number of Rubicon pharmacies (100 vs. previously announced 102) although the impact on our estimates is less material. Consequently, we have trimmed our target price to $33 (from $35).
Neighbourly reports Q1/F23 results on August 2. Our expectations are in Exhibit 1.
Impact: SLIGHTLY NEGATIVE
We are still expecting the pharmacist pool to self-correct over time primarily driven by: 1) the influx of new pharmacist graduates (~1,500/year or ~3% of the workforce) into the job market in the coming years, and further boosted by, 2) an increased level of international pharmacy graduates as Canadian immigration officials work through processing delays and backlogs. However, given the difficult labour challenges, exacerbated by the ongoing health crisis (which has accelerated pharmacist retirements and made it difficult to fill vacancies), it has the potential to to take longer to work through.
Consequently, we have reduced our margin assumption by ~50-60bps annually. That said, we are still forecasting an immediate margin bump from the Rubicon acquisition in Q2/F23 (closed on June 27) due to the higher dispensing frequency in SK (i.e., 30-day fills versus 90-day fills elsewhere) and some modest annual margin expansion as Neighbourly scales the business.
Overall, this does not change our fundamental view that we continue to like NBLY's defensive attributes (i.e., steady FCF, stable pharmacy business), which should support its M&A growth strategy, while enabling it to deleverage from 3.2x pro forma EBITDA currently to 2.6x by F2025. If we assume no acquisitions/openings, we estimate that leverage would fall to 2.7x within the next four quarters.
TD Investment Conclusion
We think that NBLY shares, which are now trading at 13.2x pro forma forward consensus EBITDA (well off of the 21.3x they were trading at the start of 2022), offers attractive value given its defensive qualities. As we move closer to the end of the interest rate tightening cycle, we would expect the shares to recover more meaningfully.