Chelsea Stellick of iA Capital Markets remains firmly behind community pharmacy company Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Chart, News, Analysts, Financials TSX:NBLY) in her latest analysis on Wednesday, upgrading her rating from “Hold” to “Buy” and raising her target price to $31.00/share from a previous $28.00/share.
Toronto-headquartered Neighbourly Pharmacy has the largest network of community pharmacies in Canada, built on an acquisitive model to consolidate independent pharmacies and aiming at acquiring, integrating and operating stores by leveraging scale and best practices across stores while minimizing disruption to acquired businesses.
Stellick’s report comes after Neighbourly announced its financial results for the first quarter of fiscal 2022, with quarterly revenues slightly below expectations, as Neighbourly reported $85.3 million against the consensus of $89 million, though it still represented a 55 per cent year-over-year increase. Adjusted EBITDA experienced a similar spike, rising 54 per cent to $10 million against a consensus estimate of $11 million and iA Capital Markets estimate of $13 million. Stellick notes that Neighbourly did experience some pandemic-related impacts, but believes this will be the last full quarter to feature any short-term distortion on account of the pandemic.
“We’re very pleased with Neighbourly’s results for the first quarter, which provide further evidence of the success of our acquisition strategy,” stated Chris Gardner, Neighbourly’s CEO, in the company’s August 3 press release. “Locations added to our network over the past four quarters accounted for approximately 83 per cent of our quarterly revenue increase. The acquisition and integration of community pharmacies is the foundation of our company’s long-term growth strategy. Across Canada, there are currently more than 3,600 independent pharmacies that meet our acquisition criteria, and we look forward to engaging with their owners as we continue to expand our network over the year ahead.”
“Neighbourly’s first quarter results also reflect the first steps towards a normalization of our business following the impact of COVID-19,” Gardner added. “Our pharmacy teams have administered well over 70,000 COVID-19 vaccinations to date, including more than 44,000 in the first quarter alone. I am exceptionally proud of the role these teams are playing in Canada’s recovery from the pandemic. Their commitment gives me great confidence in Neighbourly’s future.”
Though net new prescriptions were down almost 15 per cent in relation to pre-pandemic levels, business volumes have normalized for NBLY and same-store sales grew at a rate of 8.2 per cent due to a favourable base year comparison from COVID-19 negatively impacting sales in the same period last year.
Neighbourly has been busy on the acquisition front, adding 40 new locations over the last four quarters, which accounted for 83 per cent of the quarterly revenue growth on a year-over-year basis through sales of prescriptions and other products. Stellick suggests Neighbourly is looking strong from a liquidity perspective, with $112 million in cash on hand and access to $150 million in credit, providing significant financial leverage to execute its merger and acquisition strategy through 2023.
Neighbourly is aiming to add 35 stores per year, though Stellick is a little more conservative in her estimate.
“We are projecting 25 locations to be added this year and acquisitions increasing each year to 35 stores per year in F2025. With the increased inbound activity following the IPO, NBLY could indeed outpace this projection and keep up with its historical levels,” Stellick wrote.
Stellick’s revised viewpoint also includes a few slightly revised financial projections. She still projects $306.5 million in revenues for 2021, but Stellick raised her expectations for 2022 to $432.7 million, up from her previous projection of $430 million. The new forecast would represent a 41.2 per cent year-over-year increase from the 2021 projection.
Stellick also made a slight revision to her adjusted EBITDA estimates for 2022, moving to $63.4 million for an 8 per cent increase from her initial forecast of $57 million and an 80.6 per cent year-over-year projected increase.
Key trading multiples feature some fluctuation in Stellick’s analysis, with her EV/Revenue estimate climbing to 3.9x for 2021 from the 1.0x reported in 2019 and 2020, then lowering to 2.7x in 2022. Meanwhile, the EV/adjusted EBITDA multiple forecast shows a more consistent dip, falling from 82.3x in 2019 to 56.1x in 2020, then dropping further to 33.8x in 2021 ahead of another forecasted drop to 18.7x in 2022.
In looking forward, Stellick views the company’s continued execution of its strong acquisition strategy as being a key piece in its future growth.
“NBLY has a niche competitive position and will continue to scale by growing its portfolio of stores and creating economies of scale,” she said. “Upcoming M&A will guide the outlook and we watch for gradually improving EBITDA margins over time as the integration playbook is repeated on each acquisition.”
How well the company executes on its M&A strategy going forward will be important to watch, Stellick said.
“Given Neighbourly’s roll-up strategy and the proven track record (to date) of acquisitions fuelling growth, we have developed a base case financial profile that is hinged upon the Company continuing to steadily deliver on its intended acquisition targets. Given the multitude of independent pharmacies and their large proportion of the market (~60 per cent), we anticipate that Neighbourly will have no shortage of potential acquisition targets; as such, we view execution as being key,” she said.
At press time, Neighbourly Pharmacy was trading at $29.79/share on the Toronto Stock Exchange, up 42 cents from its Thursday closing. Neighbourly has risen considerably in the year to date, up 32.46 per cent from its January 1 rate of $22.49/share. At press time, Stellick’s $31.00 target represented a projected one-year return of 10.3 per cent