Neighbourly Pharmacy Inc T.NBLY

TD

[retiredcf]

Still looking for 50% SP appreciation. GLTA

Neighbourly Pharmacy Inc.

(NBLY-T) C$19.20

Q4/F23 Preview: Meaningful Margin Relief Still a Quarter Away Event

Neighbourly will report Q4/F23 (12-week period ended March 25) results on June 8. We have lowered our F2023 EBITDA estimate by ~2%, mostly reflecting a lower M&A contribution assumption.

We are also taking a more conservative stance around our long-term sales expectations to better reflect: 1) the slower population growth in rural communities and 2) lower visibility around contribution from increased scope of practice and clinical services. Taken together, we have lowered our F2024/F2025 EBITDA estimates by ~4%/4%. Our target price falls to $29.00 (from $30.00), after rolling valuation out another quarter.

Impact: NEUTRAL

In Q4/F23, we forecast consolidated ~70% revenue growth, driven by Rubicon and recent tuck-in acquisitions (~$77mm contribution). However, on a same- store basis, we forecast continued pressure on prescription volumes (-1.5% SSSG) and clinical services (-6% SSSG) due to: 1) changes in dispensing frequency of certain high-frequency fills; 2) the lapping of Omicron-related vaccine administration last year; and 3) a lag in in-person physician visits. We forecast 1% Front Store SSSG, reflecting ongoing supply-chain pressure and the pull-forward of demand into Q3/F23, given an earlier cold & flu season. In the long term, we see further revenue (and margin) upside stemming from increased clinical services and increased scope of practice, although visibility remains low at this point, and we have tried to reflect in our model.

We forecast 73% adjusted EBITDA growth, primarily driven by M&A, and a modest ~10bps y/y margin expansion due to higher dispensing frequency in SK, partially offset by higher costs associated with the temporary filling of pharmacist vacancies.

TD Investment Conclusion

Now that we are less of an outlier in F2024 and relatively in line with consensus in F2025, we characterize our estimate changes as neutral to the stock price. That said, we believe that the shares, trading at ~10.2x forward consensus EBITDA, have overcorrected. We believe that the return of margin expansion, as the pharmacist pool self-corrects with the steady influx of new pharmacist graduates starting this summer, is the next share-price catalyst. In addition, we remain optimistic on SSSG as in-person doctor visits recover further and expanded pharmacist scope of practice ramps up in the long-term.