Post by
Kanatainvestor on Nov 01, 2023 11:51am
Desjardins (October 24th)
The Desjardins Takeaway
Overall, NBLY’s results were solid, highlighted by slightly higher-than-expected SSSG and sequential margin improvement. However, the results are inconsequential in the context of near-term news on the outcome of the proposed transaction, which is expected before November 13. We believe the gap between the share price and offer price of C$20.50/share reflects financing uncertainties. No updates were provided and no further public comments are expected until a definitive agreement is reached.
Highlights
NBLY’s results reflect continued strength in pharmacy SSSG (5.7% vs 5.1% in the previous quarter and 4.2% in the previous year), driven by continuing favourable Rx trends from the expanded scope of practice in BC and Ontario. Adjusted EBITDA margin is expected to improve in 3Q to ~11%, ~50–60bps higher than in 2Q and up ~20–30bps yoy, mainly driven by diminishing pharmacist labour challenges in addition to gross margin improvement from pricing initiatives and better inventory management. The M&A pipeline remains solid, with a continued focus on sites with attractive EBITDA profiles and multiples at the lower end of the targeted 6–7x EBITDA range. NBLY expects to add two additional pharmacies to its network in 3Q.
Following the proposed going-private transaction by controlling shareholder PCP (50.2%) announced on October 3, the market is focused on PCP and NBLY signing a definitive agreement, which is expected before the expiry of the exclusivity period on November 13. Since the definitive agreement is contingent on PCP securing fully committed debt and equity financing (totalling ~C$450m), the wide gap (~17%) between the share price and offer price of C$20.50/share (transaction expected to close in 4Q CY23 or 1Q CY24) likely reflects financing uncertainties given current market conditions. However, NBLY stated in its announcement that both the equity and debt financing are in the advanced stages of negotiations
Valuation
Based on the offer price of C$20.50/share, we estimate the implied EV/EBITDA is ~13x based on LTM pro forma EBITDA or ~12x based on NTM pro forma EBITDA (including our own assumptions on acquisitions that NBLY will make over the next 12 months).
Recommendation
The offer price is largely in line with our C$20 target price, which is based on ~11x two-year forward pro forma EBITDA.