October 25, 2022
Neighbourly Pharmacy Inc.
Clean bill of health: FQ2 solid and in-line, reiterating constructive outlook, PT $37
Our view: Q2/F23 solid and as forecast with results underscoring the defensive nature of NBLY's business model despite lingering albeit moderating COVID distortions. NBLY continues to execute effectively on the M&A-driven growth strategy, with key FQ2/H2 event the integration of the Rubicon acquisition, and capture of $2.5 MM of short-term synergies, a figure which we expect will be augmented as we move into F24 and beyond. Labour and Rx count headwinds are already improving, reinforcing our view of these as transient, reflecting industry-wide phenomena that disproportionately impact small, independent pharmacists and supportive of a robust M&A pipeline.
Key points:
New central fill facilities should relieve pressure from vacancies, add capacity for expanding scope of service. NBLY is adding central fill facilities in ON and BC, implying five in total late FQ3. Near-term, the initiative helps mitigate the impact of pharmacist vacancies, down 25% since the end of FQ2 and forecast to return to balance mid-2023 as the new cohort graduates. On a go forward basis, these plus compounding pharmacies should result in more efficient Rx operations and, importantly, enhance pharmacist capacity to perform value-added tasks as provinces gradually increase the scope of practice.
High conviction on M&A, key driver of growth and operating leverage. With an addressable pipeline of 3.5k potential acquisition targets, and uptick in succession planning arising from pandemic fatigue, we are highly confident in NBLY ability to deliver average pace of 40 stores/year, with upside should larger networks come to market. Yesterday, the Company announced two strategically important transactions totaling eight stores that double the size of its footprint in Atlantic Canada.
Back to Q2/F23: Revenue +97% to $179 MM, adjusted EBITDA +98% to $19.8 MM and EBITDA margin 11.1% of sales all in-line with/as forecast (Ex. 1). SSS +3.6% (Ex. 2) reflecting 4.2% pharmacy $$ growth and +2.9% SSS in front of store due to strong cough, cold & flu medications, offset by 17.4% decline in clinical service as prior year boosted by initial rollout of COVID vaccines and lower levels of new Rx relative to pre-pandemic levels.
Forecasts largely unchanged, reiterating OP rating and $37 PT. With valuation flirting with IPO range ~13x going into the quarter (Ex. 7), the market is appropriately breathing a sigh of relief as results stabilize. Strong argument for valuation recovery, in our view, underpinned by highly favourable M&A backdrop, demographic trends, expansion of pharmacy services, and the positive effect of scaling and valuation arbitrage on shareholder returns. Near-term ROIC range-bound due to the size and above-average multiple paid for Rubicon, but should converge towards marginal M&A returns in the mid-teens over time (Ex. 5).