fter its first-quarter financial results fell short of expectations, analysts on the Street expect the profitability of Neighbourly Pharmacy Inc. (NBLY-T) to continue to hurt by a higher-than-usual labour costs as difficulties in replacing retiring pharmacists persist.
Shares of the Toronto-based network of independent pharmacies fell 9 per cent on Tuesday after the premarket earnings release. Revenue rose 34 per cent year-over-year to $114.4-million and EBITDA jumped 11 per cent to $11.3-million. However, both missed consensus forecasts ($115.9-million and $12.4-million, respectively).
IA Capital Markets analyst Chelsea Stellick attributed much of the miss higher-than-anticipated labour costs as vacancies continued to be unfilled.
“Unexpectedly, new prescriptions and in-person physician appointments remained below pre-pandemic levels, posing a headwind particularly to the clinic locations in NBLY’s network,” she added.
“We are confident these almost 10-per-cent Adj. EBITDA margins of this quarter and last represent the bottom for margins, given that Rubicon will immediately benefit margins in Q2/F23 as synergies are implemented and corporate costs are diluted as a percentage of revenue.”
Calling the headwinds “transient,” Ms. Stellick said Neighbourly’s business “continues to perform well, generating substantial free cash flow on a stabilized basis that will continue to be deployed to build out Canada’s fastest growing pharmacy network.”
Keeping a “buy” rating, she lowered her target for its shares to $35 from $38. The average on the Street is $31.55.
Meanwhile, National Bank Financial’s Zachary Evershed said he expects pressure from relief pharmacist costs will persist through the remainder of the company’s current fiscal year and through the first half of fiscal 2024 until next graduating cohort of new pharmacists hits the labour market in August of 2023.
At that time, he anticipates margins should “step up rapidly,” adding to improvement brought by the acquisition of Rubicon Pharmacies.
“As anticipated, profitability remained depressed due to the incremental costs of covering open positions with relief pharmacists,” he said. “Management noted vacancy rates were significantly higher relative to last year and pre-pandemic levels as openings created by retirements in rural communities have been difficult to fill. However, management believes this is the point of maximum pain and that pressure from reliance on relief pharmacists should abate with the second graduating cohort of new pharmacists in 12 months’ time. In the meantime, NBLY is focusing on moving labour-intensive compliance pack and compounding work out of rural markets and into central fill locations. Currently, NBLY is working to expand central fill capacity in AB, opening a hub in BC towards the end of August, leveraging Rubicon’s capacity in SK and planning for a new facility in ON.”
Mr. Evershed trimmed his target to $25 from $26.50, reiterating a “sector perform” recommendation.
“Though we value defensive organic growth with M&A upside, given the tight return to target, we rate NBLY Sector Perform,” he said.
Elsewhere, Desjardins Securities’ Chris Li cut his target by $1 to $25 with a “hold” rating.
“We believe the 9-per-cent sell-off was excessive following NBLY’s slightly softer-than-expected 1Q results,” said Mr. Li. “While industry pressures will persist near-term, they are largely transitory. Relative valuation has improved with NBLY now trading at 13.1 times PF EBITDA, slightly above 12.4 times for other high-growth mid-cap consumer companies. We believe NBLY is well-managed and defensive, with compelling growth through M&A. We prefer to wait for one quarter of stability in Rx growth and margin before becoming more positive.”