Neighbourly Pharmacy Inc T.NBLY

RBC

[retiredcf]

Their upside scenario target is more than a double from here ($52.00). GLTA

July 25, 2022

Outperform

TSX: NBLY; CAD 22.55

Price Target CAD 38.00 ↓ 42.00

Neighbourly Pharmacy Inc.

The Good Doctor: Reiterating constructive thesis ahead of FQ1

Our view: We reiterate our constructive long-term view on NBLY, with current valuation an attractive opportunity to establish/expand a position in one of the most defensive, high growth names in the CDN consumer sector. NBLY has i) a unique position as consolidator of choice in, ii) a defensive industry that iii) benefits from secular growth trends in the form of favourable demographics and the ongoing expansion of pharmacy services. Trimming target to $38 on impact of rising long-term rate environment on valuation; risk/ reward appears squarely to the upside for LT investors.

Key points:

Pharmacist availability issues likely a short-lived phenomenon, nonetheless reducing estimates to reflect a reality that is likely to persist for the next 12-24 months. For the better part of two decades, supply/demand of pharmacists was well-balanced. But pandemic-related absenteeism/fatigue combined with limited immigration and natural attrition causing short-term pressure on availability. Management expects the situation to improve NT with onboarding of class of 2022, further normalizing over the next 12-24 months with 1.5k new graduates annually.

• For FQ1/23 specifically: Forecasting EBITDA +21% Y/Y to $12.2MM, in line with consensus $12.3MM, predicated on i) SSS +3.6% with bias to the upside in light of the unusually strong CQ2 flu season (Exhibits 3-4); ii) +4 net new stores this Q including one greenfield in hospital setting (+43 Y/Y); partially offset by iii) margin headwinds from the aforementioned labour availability challenges.

• First Sustainability report to be published in conjunction with the upcoming earnings release.

  Thesis unchanged, target -$4 to $38 on rising rates and the related impact on our long-term valuation outlook. Refer to our early July management meetings note for a more fulsome discussion around the business' long- term prospects and key attributes underpinning its defensive growth model across economic cycles; at a glance:

• Defensive organic growth. i) Stable demand: ~80% of NBLY revenues derived from largely non-discretionary Rx (90% covered by public/private plans), ii) supported by secular tailwinds of an aging population, and iii) potential to leverage pharmacy services as a release valve for the healthcare system; Pharmacare likely a net positive on increased insurance coverage levels.

• Rubicon transaction (closed June 27) a key de-risking event.

• High conviction around sustainability of M&A pace: For F23, NBLY targeting +115 new stores including 100 from Rubicon, management is highly confident in its ability to continue with the pace of 40+ stores/year, with upside should larger networks come to market