Neighbourly Pharmacy Inc.
(NBLY-T) C$23.48
As In-Person Health Care Returns, So Should New Prescriptions Event
Following Q4/22 results and conference call, we lowered our F23/24/25 adj. EBITDA estimate by ~10%/4%/3%, mostly to reflect the updated timing of the Rubicon closing (i.e., early Q2/F23 versus original forecast of mid-Q1). We are also assuming 15 tuck-in acquisitions and 1 opening in F2023 (down from 35 in total). We have trimmed our target valuation range to 13.5x-14.5x (from 15x-16x) to reflect market conditions, including ongoing staffing challenges. Consequently, our target price falls to $35 (from $39).
Impact: MIXED
The changes to our forecasts do not reflect any major changes to our view of the operating environment. There is no doubt that the industry grapples with a slower post-COVID-19 renormalization. However, our model is reflective of an improving outlook and consequently, a gradual easing of these pressures driven by:
1. Increased clinic activity including in-person physician visits, day surgeries and procedures. New prescription growth should follow as online consultations are not nearly as productive in driving meaningful prescriptions. Also, Ontario's temporary funding for virtual care will end on September 30, which we think could be a tailwind to encourage in-person clinical appointments.
2. The addition of new pharmacy graduates (i.e. ~1,500/year) to the employment pool, combined with improving working conditions as the pandemic fades, should help right-size the industry's employment imbalance over the next 12 months, in our view.
Despite the rising interest rate environment, we believe that Neighbourly can still execute on its M&A growth strategy and deleverage at the same time given the steady stream of free cash flow, mostly generated by pharmacy sales. Specifically, we are expecting pro-forma leverage to fall from 3.2x to 2.8x/2.6x/2.4x in F23/24/25 which includes 16/40/40 pharmacies added, respectively. Absent any new acquisitions/openings, we estimate that leverage would fall to 2.5x within the next 4 quarters.
TD Investment Conclusion
We think that NBLY shares, which are now trading at 12.2x pro forma forward consensus EBITDA (well off of the 21.3x they were trading at the start of 2022), have overcorrected. In addition to the defensive qualities, we expect the shares to recover more meaningfully as we move closer to the end of the interest rate tightening cycle.