Neighbourly Pharmacy Inc.
(NBLY-T) C$15.48
Stress Testing the M&A Model Event
In light of ongoing macroeconomic/industry headwinds, including elevated interest rates and pharmacist shortages, we performed sensitivity analyses around NBLY's roll-up M&A strategy. Specifically, we ran several scenarios focusing on the impact of: 1) interest rates, 2) pace of margin recovery, 3) purchase multiples, and 4) pace of M&A, on NBLY's leverage ratios.
Impact: NEUTRAL
The results from our analyses are summarized on page 2. For simplicity, we limited each scenario to two variables at a time. Based on this, we conclude the following:
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NBLY's roll-up strategy is robust and that the company should be able to continue to execute on M&A despite near-term macroeconomic and operating challenges.
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Under two extreme scenarios, and holding all else equal, our model suggests that the company would only trip its 3.75x debt covenant at the end of F2025 (March 2025). Specifically:
Extreme scenario #1: a) ≥12% interest rate on bank debt (versus
8-9% currently) and b) lingering pharmacists shortages limiting EBITDA margin expansion to only 20bps/year (versus our ~70bps/year forecast)
Extreme scenario #2: a) purchase multiples ≥7.0x (vs. ≤6.4x now) and b) an M&A cadence at the high end of the guided 10-20% of prior year's pro forma adjusted EBITDA (versus our 10-15% forecast), That said, we view this scenario as the least likely, given that these two variables are relatively controllable by management.
3. Under what we believe to be a more reasonable downside scenario of a longer margin recovery (20 bps/year) and modestly higher interest rates (10%), but a) no change in purchase multiples (~6.4x) and b) an M&A cadence at the midpoint of the guided 10-20% of prior year's pro forma adjusted EBITDA, we see NBLY unlikely to trip its covenant over the next five years.
TD Investment Conclusion
Our model assumes 1) 12.6% EBITDA margin by F2026, 2) historical purchase multiples, and 3) declining interest rates starting in Q2/C24. Together, we are forecasting <3.0x leverage by F2026 (from 3.5x currently).