Neighbourly Pharmacy Inc.
(NBLY-T) C$19.68
Rubicon Contribution Partially Offset by Lingering Pressure Event
Neighbourly will report Q2/F23 results on October 25. We have lowered our F2023 revenue/EBITDA estimates by ~1%/2%, mostly to reflect the timing of M&A, a more gradual return of in-person physician visits (and consequently a slower rebound in new-script volume in NBLY's clinic locations), and the ongoing labour challenges. Our $19.5mm Q2/F23 EBITDA estimate is in line with consensus of $19.8mm (range $$18.9mm-$21.2mm).
We have also increased/decreased our F2024/F2025 financing costs by 9%/10%, reflecting the expectations of higher near-term interest rates followed by cuts.
We have trimmed our valuation range to 12x-13x (from 13.5x-14.5x) to better reflect the challenging operating environment and current investor reluctance around M&A-driven growth. Consequently, our 12-month target price falls to $28.00 (from $33.00).
Impact: SLIGHTLY NEGATIVE
In Q2/F23, Rubicon will contribute for the first time (i.e. earnings are consolidated for 11 out of the 12 weeks) and, as a result, we should see a material bump in the EBITDA margin, primarily due to changes in the geographic mix and the higher dispensing frequency in SK (i.e., 30-day fills versus 90-day fills elsewhere), in particular. We do expect this to be partially offset by persistent higher costs (there will be some impact on Rubicon as well) associated with the temporary filling of pharmacist vacancies. Overall, we have reduced our 2022 margin assumption by ~20bps, pushing down our EBITDA estimate by 2%.
Looking ahead, 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.
TD Investment Conclusion
We believe that NBLY shares, now trading at ~11.6x forward consensus EBITDA (well off of the 21.3x they were trading at at the start of 2022), have overcorrected. However, with M&A no longer a catalyst for the time being, they are more likely to be range-bound in the short term. In the long term, we expect the shares to recover more meaningfully as we move closer to the end of the interest-rate-tightening cycle.