Neighbourly Pharmacy Inc.
Just what the doctor ordered: Solid, in-line Q4 and constructive tone; fine-tuning forecasts, PT to $34
Our view: Solid and in-line Q4 results, constructive tone on the conference call, and strategic priorities broadly aligned with IPO messaging should be a modest positive on investor sentiment. Reiterating OP rating, PT to $34 (-$1) on fine-tuning of forecasts.
Key points:
Q4 results solid and in line with forecast and consensus (Exhibit 1). SSS growth +1.6% (Rx +1.5%, Front store +3.9%) reflects transient pressure of one-time impact to billing practices for specialty molecules. On an adjusted basis, SSS would have been +2.4% with modest acceleration Q1-to-date (11/13 weeks) in the range of 2.7-3%, consistent with LT target range 2.5-3.0%. EBITDA margin 10.3% (+20 bps Y/Y and in line) underpinned by geographic mix and scaling. Staffing headwinds remains a key transient offset. Pharmacist vacancies ~54 from 60 at quarter-end should improve mid-Q2/F24 with onboarding of 20 graduates. Management confident labour headwinds (80 bps in F23) largely resolved by Q2/F25 with class of 2024 onboarding and launch of new partnership model getting good early traction with seasoned pharmacists.
Cementing position as acquirer of choice. Subsequent to quarter-end, NBLY announced acquisition of three stores in ON and seven in Western Canada (two in BC, five in SK), with price paid for these above-average performing stores within historical range of 6-7x. With greater scale, opportunity around shared services, and consolidation of key competitor Rubicon, the company is currently probing low end of the range. As part of ongoing review process, closed two underperforming pharmacies and consolidated scripts in another two for total store count 291. Initial synergies $2.5 MM annual run-rate from Rubicon now complete with the integration of payroll and financial systems and, broadly consistent with expectations, management identified an additional $0.5 MM synergies to be captured in F24. With an addressable pipeline of 3.5k potential acquisition targets, we remain confident in NBLY's ability to deliver average pace of 35-40 stores/year, with potential upside should larger networks come to market.
Tweaking forecasts on cadence of opex normalization through F25, reiterating OP rating although share price could be range bound until visibility improves. PT to $34 (-$1). With C23E EV/EBITDA 12.2x flirting with IPO range (Exhibits 6 and 7), in our view there is a strong argument for valuation recovery 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 (Exhibit 3).