September 13, 2022
Neighbourly Pharmacy Inc.
Rx for LT stability - Reiterating constructive LT view despite NT headwinds
Our view: Reiterating constructive outlook ahead of FQ2; Labour and Rx count headwinds that are likely to moderate results should be transient. These headwinds reflect industry-wide phenomena that disproportionately impact small, independent pharmacists and should support a robust M&A pipeline. Maintaining OP rating, $37 target.
Key points:
Transient headwinds should abate in F24, LT outlook remains solid. Forecasting NTM adj. EBITDA $96.9 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. Pharmacist vacancy should be a transient headwind, easing mid-F24 with ~1.5k new graduates. Importantly, the planned opening of central fill facilities in BC/ON plus two acquired with Rubicon should relieve pressure in store. Forecasts also incorporate a gradual recovery in script counts.
• FQ2/23E EBITDA +11% Y/Y to $20.1MM, in line with consensus $20.2MM. 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, and iii) Contribution from Rubicon (~11/12 weeks); at investor conference earlier today CEO noted integration progressing well with almost 75% of $2.5 MM target realized. F23-25E unchanged.
Long-term view supports $37 1-year target (exhibit 4). At this time, we are extending our model to F35E and tweaking a number of modelling and valuation assumptions, the net result of which is a $117 F34 target price, or $37 discounted back to a 1-year horizon. Some of the key assumptions include: i) Terminal EBITDA multiple to 11.5x from 12x reflecting the maturity of the business, ii) discount rate increased by 50bps to 11.5% to reflect the long-term rate environment as well as the degree of conservatism embedded in our estimates, iii) Rising M&A spend (stabilizing at 50 stores/year in F28E+) and working capital requirements, and finally iv) NCIB initiation in F29E to maintain leverage in the 2.5x range.
• High conviction on M&A, key driver of growth and operating leverage. With an addressable pipeline of 3.5k potential targets, and an uptick in succession planning conversations as pandemic fatigue takes hold, we remain confident in NBLY ability to continue with the average pace of 40 stores/year, with upside should larger networks come to market.
• Defensive organic growth: ~80% of NBLY revenues largely non- discretionary Rx (90% covered), supported by secular tailwinds of an aging population and expanded scope of service.
• Favourable risk/reward with “show-me” valuation back to IPO level (~13x PF LTM EBITDA - exhibit 7).