Neighbourly Pharmacy Inc.
Gesundheit! Looking past transient, industry-level headwinds; target to $37
Our view: Q1/F23 solid and generally as forecast, although ongoing COVID disruptions had a slightly more pronounced impact than we had anticipated on labour costs and clinic volumes. Accordingly, we are fine-tuning our F23E/F24E and target to $37 (-$1); F25E essentially unchanged. We reiterate our constructive outlook for NBLY and remind investors that both labour and Rx count headwinds are transient, industry- wide phenomena that disproportionately impact small, independent pharmacists and should help keep M&A pipeline and discussions buoyant over our forecast horizon.
Key points:
Fine-tuning forecasts, long-term outlook solid and unchanged. Revised NTM adjusted EBITDA $96.9 MM, +1.5% vs. pro-forma $95.5 MM underpinned by relatively modest M&A +17 in addition to Rubicon +100, very low SD SSS, and partly offset by ongoing drag from labour and Rx counts. Having said that, pharmacist vacancy is a transient headwind that should ease, notably as of Q2/F24 with the industry welcoming ~1.5k graduates annually. Importantly, the planned opening of central fill facilities in BC and ON in addition to two acquired in conjunction with Rubicon should help relieve pressure in store. Revised forecasts also incorporate more gradual recovery in script counts as rolling COVID waves continue to suppress physician visits and chronic disease diagnoses.
High conviction on M&A, key driver of growth and operating leverage.
With an addressable pipeline of 3.5k potential acquisition targets, and an uptick in succession planning conversations as pandemic fatigue takes hold, we are highly confident in NBLY ability to continue with the average pace of 40 stores/year, with upside should larger networks come to market. For the rest of F23, NBLY is on track to close another 10 acquisitions (RBC CM +7) in addition to +4 in Q1 and +100 from Rubicon early Q2. Aggressive growth tack resulting in more gradual Rubicon-related deleveraging than FCF conversion would otherwise indicate.
Back to Q1/F23: Revenue +34% to $114.4 MM as forecast and adjusted EBITDA stable sequentially at $11.3 MM, shy of forecast $12.2 MM. EBITDA impacted by: i) ongoing absenteeism due to lingering COVID impacts, and related costs of replacement labour; ii) depressed Rx volumes, notably in clinic settings, as new Rx volumes continue to lag pre-COVID levels with ongoing delays in non-COVID-related health care visits/procedures.