TD (August 31st)Outlook:
Management remains focused on its three key growth drivers. It is also implementing additional initiatives that should accelerate growth and deliver healthy, consistent financial results in the base business. Specifically:
• M&A to add 10-20% to NBLY’s pro forma EBITDA run rate annually.
• Organic growth driven by, among others, pricing and merchandising optimization, economies of scale, a complementary front-store offering and new digital pharmacy tools.
• Leveraging expanding pharmacists’ scope of practice.
We forecast average revenue/EBITDA growth of ~17%/24% from F2023 to
F2026, mainly driven by:
1) solid organic growth;
2) M&A;
3) full-year contribution from Rubicon starting in F2024;
4) improvement in the pharmacist labour pool
5) operational gains from growing scale.
We expect Neighbourly’s EBITDA margin to expand to 12.6% from 10.6% and adjusted EPS to improve to $1.23 from $0.46 over the same period. Given its solid operating cash flows driven by earnings growth, we expect Neighbourly to also de-lever, albeit modestly (i.e., ~2.8x leverage by the end of F2026E), while still making acquisitions, which we expect to contribute ~10-15% to NBLY’s pro forma EBITDA run rate annually throughout our forecast horizon.
Valution:
Neighbourly’s valuation had fallen to ~9.1x forward consensus EBITDA, driven by increased interest rate expectations. Looking ahead, unless there is a further ratcheting up of regulatory rhetoric, higher interest-rate expectations, sector rotation, and/or a material slowdown in Neighbourly’s acquisition cadence, we believe that there is relatively limited risk to further valuation contraction from here. (For context, NBLY forward EBITDA multiple since the IPO stands at 13.7).