Neighbourly Pharmacy is a buy, says Industrial Alliance

It’s a beautiful day in the neighbourhood, says iA Capital Markets analyst Chelsea Stellick, who’s staying bullish on newly IPO’d community pharmacy company Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Chart, News, Analysts, Financials TSX:NBLY). In a research report to clients Thursday, Stellick reviewed NBLY’s latest quarterly financials and maintained both her “Buy” rating and $28.00 target price.

Toronto-headquartered Neighbourly Pharmacy has the largest network of community pharmacies in Canada, built on an acquisitive model to consolidate independent pharmacies, aiming at acquiring, integrating and operating stores by leveraging scale and best practices across stores while minimizing disruption to acquired businesses. Neighbourly currently has 145 locations across Canada, with 39 acquired over its fiscal 2021 year (ended March 27).

Neighbourly recently closed its initial public offering of about 10.3 million common shares at $17.00 per share for gross proceeds of about $175 million, with the shares beginning trading on the TSX on May 25. Concurrent with the IPO, the company announced an added $18-million private placement of about 1.1 million shares, while in early June, Neighbourly announced the closing of an over-allotment option on the IPO for an additional $26.25 million.

Neighbourly announced on June 24 its financial results for the fourth quarter fiscal 2021, showing revenue up 58 per cent year-over-year to $83.3 million for the Q4 and adjusted EBITDA up 115 per cent to $9.0 million. The company said both top and bottom increases were driven by the addition of acquired pharmacies over the fiscal year.

“Executing against our growth strategy in combination with our team’s tireless efforts has established Neighbourly as Canada’s largest and fastest growing network of community pharmacies,” said CEO Chris Gardner in a press release. “Our recent IPO provided the resources to accelerate this growth and pursue additional acquisition opportunities within a highly fragmented market. I look forward to sharing our progress.”

The company said COVID-19 had a substantial impact on its business, starting in March 2020 where it experienced a temporary but significant increase in demand due to consumer uncertainty in the early days of the pandemic. That resulted in a 14.7-per-cent increase in same-store stales over the final month of the fourth quarter 2020, which led to the more modest 0.4-per-cent year-over-year same-store sales growth for the Q4 2021. At the same time, Neighbourly said same-store sales have “begun to normalize,” which should lead to a return to its historical trend of same-store sales improvement.

Looking at the quarterly results, Stellick said sales and EBITDA beat consensus estimates on the back of the acquired 39 stores over the fiscal year, while the company’s operating performance ended up marginally below her expectations due to higher expenses related to large-scale acquisitions now closed.

Stellick said NBLY has a niche competitive position and should continue to scale up by growing its portfolio of pharmacies. The analyst said upcoming M&A activity will guide her outlook on the company and stock, where Stellick will be watching for improving EBITDA margins after the fiscal first quarter 2022.

“Already positioned as the acquirer of choice, NBLY has announced the acquisition of 14 stores so far in F2022 and increased Company visibility from the IPO that resulted in more inbounds from acquisition targets,” Stellick wrote.

“Given this growing pool of targets alongside a less than 1.3x net debt to pro forma Adj. EBITDA post-IPO (considerably below NBLY’s target leverage ratio of 2.5x), we believe the risk on M&A execution is turning asymmetric to the upside,” she said.

“Neighbourly’s improved negotiating position could enable management to cherry pick high quality stores, acquire at a faster rate, and apply downward pressure on multiples. The Company was recognized as one of Canada’s Best Managed Companies in May, validating our confidence in management’s ability to manage the rapid growth pipeline to the benefit of shareholders,” Stellick said.

Stellick is calling for Neighbourly to generate fiscal 2022 revenue and adjusted EBITDA of $430.0 million and $56.9 million, respectively, and fiscal 2023 revenue and EBITDA of $511.0 million and $70.2 million, respectively.

In its brief tenure as a public company, NBLY, with a market cap of $868 million, has been in the black and is currently trading around the $26.00 mark. At press time, Stellick’s $28.00 target price represented a projected one-year return of 7.7 per cent.

“Neighbourly is targeting 25 acquisitions per year which is modestly lower than the historical run rate of 30-35 and accounts for the maturity of the business and the requirement to spend the additional time needed to stabilize after significant acquisitions made in recent years,” Stellick said.

“We have modelled this growth along with the modest organic growth per pharmacy for Pharmacy, Front Shop, and Clinical Services. The IPO has increased their visibility which we believe improves their optionality and ability to high grade the targets and be more aggressive on acquisition metrics going forward,” she said.