Neighbourly Pharmacy Inc T.NBLY

Scotia down target price

[incomedreamer11]

Looking for Margin Pressures to Abate in 2H

OUR TAKE: Mixed. Q4 results were largely in line with expectations. We are encouraged by the medium-/longer-term prospects of the business, which include benefiting from extended scope and also company-specific initiatives (improved pricing, inventory & w/cap management and better front of store). That said, near-term headwinds remain, with the ongoing pharmacist shortage (54 vacancies remain vs. 60 last quarter) adding 80 bps of cost pressure. We expect this to start to abate only in 2H/F24. Our Q1 (and F24) organic estimates have been revised downward.

We believe organic margins are at trough levels, but patience will likely be required as the recovery will take time. We continue to like NBLY’s defensive characteristics and its FCF generation which enables the company to self fund deals (we estimate in the high 20s/low 30s/year).

KEY POINTS

NBLY reported revenue/adj.EBITDA of $191M/$19.6M vs. our $191M/$19.8M and consensus’ $191M/$19.7M. SSS growth came in at 1.6%, below our 2% and 4.1% in Q3. SS pharmacy sales grew 1.5%, with a 0.6% decrease in count, driven by one-time impacts of billing practices for specialty molecules. Excluding the impact, SS pharmacy sales growth would be 2.4%. Front-store SSS grew 3.9%, supported by robust demand across categories. Clinical services were down 20.1% due to the lapping Omicron vaccinations. Excluding this impact, clinical services grew 7.4% on a same-store basis. Adj. EBITDA margin of 10.3% was slightly lower than our 10.4%, driven by higher-than-expected store operating and general expenses and CG&A rates (26% and 3.8% respectively), partly offset by higher GM (40.1%).

What did we learn from the call/follow-ups? (i) With the majority of Q1 completed, overall SSSG is trending at 2.6%-2.8% (in line with longer-term averages), (ii) EBITDA margin expansion in Q1 is expected to be similar to Q4, implying a margin of 10% (vs. consensus of 10.9%); Q1’s 30 bps sequential decline is due to seasonality and labor pressures. Labour shortage had an 80-bps impact on F23 EBITDA margin. Vacancy improved slightly from 60 to 54 in Q4, (iii) $2.5M Rubicon synergies are now fully realized; $0.5M of additional ones were identified, (iv) NBLY closed 2 stores with immaterial revenue and EBITDA impact, and consolidated the script files (retaining >90%) of 2 other stores into adjacent stores. It has no plans to close others in the NT, (v) NBLY introduced the pharmacy partnership model and intends to continue the roll-out of this model (4 partners currently, expect to add >10 this year) and (vi) NBLY is comfortable continuing its M&A strategy (35 to 40 in F24 vs. 11 announced) and would take leverage as high as 4.0x (pro forma).We have updated our estimates to reflect the recent acquisitions, in addition to, margin pressure over the next few quarters with a recovery expected in 2H/F24 and a full recovery closer to F25. We estimate 1H/F24 and F24 adj. EBITDA margin of 10.7% and 11.1% (F24 exit at 11.4%). We have also rolled forward our valuation to our newly introduced F25 estimates. Our target moves to $24.50 per share. Lastly, on the balance sheet, our F24 and F25 exit leverage is 3.5x and 3.4x (we model 35 acquisitions per year).