Another downgrade Despite calling Neighbourly Pharmacy Inc.’s (NBLY-T) in-line fourth-quarter results “solid,” Desjardins Securities analyst Chris Li wants to “wait for better margin visibility” before raising his rating for its shares.
“While same-store sales are trending in line with the long-term range, elevated costs related to the pharmacist shortage will weigh on margins for two more quarters,” he said.
“4Q FY23 revenue and adjusted EBITDA were right in line with our forecast and consensus. Lower-than-expected same-store sales (1.6 per cent vs 3.0-per-cent estimate) was due to transitory factors, with the trend normalizing in 1Q FY24 (2.6–2.8 per cent, in line with the long-term range). Since the recently announced acquisitions (10 sites) will close after 1Q FY24, we expect 1Q FY24 revenue to be largely in line with the $191-million in 4Q FY23 (vs current consensus of $198-million). Pharmacist temporary relief staffing headwinds are expected to persist in 1H FY24 and weigh on margins before improving in 2H FY24. We forecast 40–50 basis points year-over-year improvement in 2H.”
Mr. Li thinks the M&A pipeline “remains robust” for the Toronto-based company, seeing it on track to acquire 35-40 pharmacies this year at a “favourable valuation.”
“NBLY is leveraging its solid financial position and strong reputation as the acquirer of choice to seek high-quality assets with above-average EBITDA per site while at the same time being able to pay at the lower end of the historical 6–7 times EBITDA range,” he said. “Despite recent noise around increasing competition for M&A, NBLY is on track to acquire 35–40 pharmacies a year. Management remains comfortable with pro forma leverage of 3.5 times net debt/EBITDA, with some flexibility to take this up to 4 times for high-quality acquisitions. We estimate leverage will remain in the mid- to high-3 times range based on 35–40 acquisitions per year at 6–7 times EBITDA.”
Maintaining a “hold” rating for its shares, Mr. Li reduced his target to $21 from $25 after lowering his 2024 EBITDA expectation based on margin pressure in the first half of the fiscal year. The average on the Street is $27.44.