Neighbourly Pharmacy Inc.
Neighbour-hood watch: Moderating forecasts ahead of Q1/F24 results
Our view: Adjusting underlying assumptions to reflect more conservative outlook on both F24E SSS and F24E/F25E network growth. With NBLY credit facilities fully exposed to variable rates, we are moderating our network growth outlook to sustain leverage close to current levels. Nonetheless, revised forecast +33 stores each year could prove conservative relative to stated range 35-40 if the backdrop improves. Combination of lower financial forecasts (F24/F25 EBITDA down -6% and -10% from prior) and target multiple 14x (-1x) to reflect higher interest rates and slower pace of M&A results in PT -$6 to $28.
Key points:
Forecasting EBITDA $19.6 MM, unchanged from prior and stable sequentially when NBLY reports Q1 on August 1. Stable incidence of flu at interseasonal levels but lower than prior year and pre-pandemic average should moderate demand for OTC medication in FQ1 (Exhibit 2). Nonetheless, our Q1E SSS +2.9%, consistent with disclosed range 2.7-3.0% after 11/13 weeks completed and long-term target range 2.5-3.0%. EBITDA margin 10.0% (+14 bps Y/Y) underpinned by geographic mix and scaling. Q1 includes one greenfield location in ON and closure or consolidation of four existing locations. Staffing headwinds remain a key transient offset. Pharmacist vacancies ~54 from 60 at the end of Q4 should improve mid- Q2/F24 with onboarding of 20 graduates. Labour headwinds (80 bps in F23) should be largely resolved by Q2/F25E with class of 2024 onboarding and launch of new partnership model getting good early traction with seasoned pharmacists.
Acquisitions announced during Q1 likely closed beginning of Q2 (end of June). During Q1, NBLY announced the acquisition of three pharmacies in ON and seven in Western Canada. Management anticipated closing end of June so likely no impact on Q1 ended June 17. Price paid for these above-average performing stores within historical range of 6-7x, but with greater scale, opportunity around shared services, and consolidation of key competitor Rubicon, the company has indicated it is probing the low end of the valuation range. Rubicon integration and initial synergies $2.5 MM annual run-rate complete as of Q4/F23 with an additional $0.5 MM synergies to be captured in F24E.
Reiterating OP rating on compelling LT opportunity, although share price could be range bound until visibility improves. PT to $28 (-$6). Moderating target multiple from 15x to 14x Q1/26E EBITDA reflecting higher financing rates and expectation of slower M&A near term to preserve the balance sheet, results in a revised price target of $28 (-$6). Revised target multiple about 0.5 standard deviation below the mean, appropriate in our view given LT growth runway, improving productivity outlook, offset by higher rates.