Revised TargetsAs can be seen, Desjardins wasn't much of a fan in the first place. GLTA
While he deemed Neighbourly Pharmacy Inc.’s first-quarter 2024 financial results as “solid, highlighted by a strong sequential acceleration in pharmacy same-store sales growth,” Desjardins Securities analyst Chris Li said he’s continues to “prefer to wait for better visibility on some of the catalysts” before becoming bullish on its shares.
The Toronto-based company surged 10.4 per cent on Tuesday after it released better-than-anticipated results, driven by overall same-store sales growth of 4.1 per cent that topped Mr. Li’s 2.8-per-cent estimate.
“NBLY’s results reflect a solid sequential improvement in pharmacy SSSG (to 5.1 per cent from 0.2 per cent) driven by script count nearing pre-pandemic levels and early benefits from the expanded scope of practice in BC and Ontario,” he said. “While pharmacist relief costs will continue to weigh on near-term margins, they should ease starting in 2H. The M&A pipeline remains solid with a greater focus on sites with higher EBITDA contributions and staffing availability, while testing lower multiples. Operational improvement and organic growth initiatives are on track and should start contributing to margins in 2H.”
After trimming his multiple to bring it more in line with the current valuation, Mr. Li cut his target for Neighbourly shares by $1 to $20, keeping a “hold” recommendation. The average on the Street is $26.33.
“While we believe the current valuation (approximately 11 times 12-month forward pro forma EBITDA) is fair given current market conditions, upside potential could come from: (1) margin improvement starting in 4Q as labour cost pressures ease and operational improvements ramp up; (2) better visibility on the pace of M&A; (3) progress on leverage reduction/falling interest rates; and (4) higher ROIC [return on invested capital],” he said.
Elsewhere, Scotia Capital’s George Doumet trimmed his target to $24 from $24.50 with a “sector outperform” rating.
“NBLY’s Q1 financials were largely in line with Street expectations (and so was the Q2 margin guidance). Internals exceeded expectations – with pharmacy same-store sales coming in ahead of expectations, while the smaller front store saw a deceleration driven by softer cold/flu demand,” he said. “Looking ahead, while we acknowledge that margin normalization is a 12+ month journey, we are encouraged by the company-specific initiatives underway, including improved pricing, inventory and w/cap management and a better front of store.
“In the context of current valuation (approximately 8.5 times EBITDA on F25E EBITDA), we forecast stable 3-per-cent SSS growth and improved visibility on the cadence of margin improvement from today’s trough levels as enough to move the stock higher. We expect the NBLY to acquire at the middle of its 10-per-cent to 20-per-cent EBITDA growth target and for leverage to land at 3.6 times exiting F24.”