Neighbourly Pharmacy Inc T.NBLY

RBC 2

[retiredcf]

Their upside scenario target is $42.00. GLTA

August 1, 2023

Neighbourly Pharmacy Inc.

Quarterly check-up: Q1 solid and in-line, tone and sentiment both improving

Our view: Solid and in-line Q1 results underscore defensive nature of NBLY's business model and should be a modest positive on investor sentiment. With NBLY credit facilities fully exposed to variable rates, our financial forecasts and network growth outlook are predicated on stable leverage close to current levels. Nonetheless, forecasts could prove conservative if the backdrop improves. Tweaking financial forecasts, reiterating OP rating and $28 PT.

Key points:

Q1 results solid and in line with forecast and consensus (Exhibit 1).

SSS growth +4.1% led by Rx +5.1%, while Front store +0.5% reflected moderating OTC cold and flu medications consistent with our read of mild interseasonal flu heading into the quarter. Looking ahead to the rest of F24, we forecast average SSS growth +3%, at the high end of LT target range 2.5-3.0%. Corporate G&A expenses 3.5% of revenue, 50 bps improvement over prior year due to scale and synergies and should remain in 3.5-3.6% range throughout F24. EBITDA margin 10.1% (+25 bps Y/Y and broadly in- line with forecast +15 bps) underpinned by geographic mix and scaling. Our F24E/F25E EBITDA forecasts $96/$118 MM, representing YtY growth of 21.6% and +22.5% respectively, toward the high-end of management range 10-20% annual contribution from M&A.

Improvement in staffing headwinds as of H2. Backdrop should begin to improve mid-Q3/F24 with onboarding of 16 graduating pharmacists in August. Management confident labour headwinds largely resolved by next summer with class of 2024 onboarding and traction of new partnership model, with one pharmacy currently signed into the program and five more in the pipe.

Financial forecasts predicated on relatively stable leverage. NBLY continues to execute effectively on the M&A-driven growth strategy with 95% of Q1 EBITDA growth attributable to M&A. NBLY closed the acquisition of three stores in ON and seven in Western Canada (two in BC, five in SK) with price paid for these above-average performing stores within historical range of 6-8x. Our F24E leverage 3.5x consistent with PF leverage at the end of FQ1, lower than indicated comfort level up to 3.7x for strategic opportunities.

Tweaking forecasts on cadence of opex normalization, reiterating OP rating although share price could be range bound until visibility improves. Reiterating $28 PT. Target multiple 14x Q1/26E EBITDA reflects higher financing rates and expectation of slower M&A near term to preserve the balance sheet. Revised target multiple about 0.5 standard deviation below the mean, appropriate in our view given LT growth runway, improving productivity outlook, offset by higher rates.