Neighbourly Pharmacy Inc T.NBLY

TD Report

[retiredcf]

Neighbourly Pharmacy Inc.

(NBLY-T) C$15.48

Stress Testing the M&A Model Event

In light of ongoing macroeconomic/industry headwinds, including elevated interest rates and pharmacist shortages, we performed sensitivity analyses around NBLY's roll-up M&A strategy. Specifically, we ran several scenarios focusing on the impact of: 1) interest rates, 2) pace of margin recovery, 3) purchase multiples, and 4) pace of M&A, on NBLY's leverage ratios.

Impact: NEUTRAL

The results from our analyses are summarized on page 2. For simplicity, we limited each scenario to two variables at a time. Based on this, we conclude the following:

1. NBLY's roll-up strategy is robust and that the company should be able to continue to execute on M&A despite near-term macroeconomic and operating challenges.

2. Under two extreme scenarios, and holding all else equal, our model suggests that the company would only trip its 3.75x debt covenant at the end of F2025 (March 2025). Specifically:
    Extreme scenario #1: a) ≥12% interest rate on bank debt (versus

   8-9% currently) and b) lingering pharmacists shortages limiting EBITDA margin expansion to only 20bps/year (versus our ~70bps/year forecast)

 Extreme scenario #2: a) purchase multiples ≥7.0x (vs. ≤6.4x now) and b) an M&A cadence at the high end of the guided 10-20% of prior year's pro forma adjusted EBITDA (versus our 10-15% forecast), That said, we view this scenario as the least likely, given that these two variables are relatively controllable by management.

3. Under what we believe to be a more reasonable downside scenario of a longer margin recovery (20 bps/year) and modestly higher interest rates (10%), but a) no change in purchase multiples (~6.4x) and b) an M&A cadence at the midpoint of the guided 10-20% of prior year's pro forma adjusted EBITDA, we see NBLY unlikely to trip its covenant over the next five years.

TD Investment Conclusion

Our model assumes 1) 12.6% EBITDA margin by F2026, 2) historical purchase multiples, and 3) declining interest rates starting in Q2/C24. Together, we are forecasting <3.0x leverage by F2026 (from 3.5x currently).