Neighbourly Pharmacy Inc.
Fine-tuning the Rx: Constructive underlying thesis unchanged, PT to $36
Our view: Reiterating constructive outlook on NBLY, although NT uncertainty around CEO transition could keep shares in a trading range. Fine-tuning the cadence of margin progression reflecting: i) transient labour and Rx count headwinds that disproportionately impact small, independent pharmacies, which should slowly improve as we move through calendar 2023, especially once the graduating class of pharmacists joins the workforce, ii) M&A pipeline at attractive takeout multiples remains robust. Reiterating OP rating, PT to $36 (-$1).
Key points:
FQ3/23E EBITDA $29.0MM, largely consistent with consensus $28.7MM [range: $26.9MM-$30.4MM]. Expecting: i) ongoing staffing headwinds, with anecdotal evidence of higher costs to fill vacancies, ii) below-potential Rx volumes, notably in clinic settings, partially offset by iii) above-average demand for cough, cold & flu medications.
• Looking ahead: Over time, new central fill facilities should help relieve pressure from vacancies, add capacity for expanding scope of service. NBLY is adding central fill facilities in ON and BC, implying five in total late FQ3. Central fill facilities can be an important tool to mitigate the impact of pharmacist vacancies, down 25% from FQ2-end to late October, and forecasted to moderate in H2/2023 as the new cohort of graduates comes online. On a go forward basis, these plus compounding pharmacies should result in more efficient Rx operations and, importantly, enhance pharmacist capacity to perform value-added tasks as provinces gradually increase the scope of practice.
Fine-tuning forecasts on ongoing pharmacy staffing cost pressures. Reiterating OP rating, PT to $36 (-$1) although share price could be range-bound NT pending increased comfort with new management. With valuation flirting with IPO range at ~12.6x NTM Consensus EBITDA (Ex. 7), we believe there is a strong argument for valuation recovery over the next 12 months underpinned by a highly favourable M&A backdrop, demographic trends, expansion of pharmacy services, and the potential for enhanced operating efficiency. Near-term ROIC range-bound due to the size and above-average multiple on Rubicon, but in our view should converge towards marginal M&A returns in the mid-teens over time (Ex. 5).
• 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 to make acquisitions, and now with larger scale of stores base, enhance operating efficiency.
• Defensive organic growth: ~80% of revenues largely non-discretionary Rx, supported by demographics and scope-of-service tailwinds.
• Favourable risk/reward with “show-me” valuation: 12.6x NTM EBITDA.