Neighbourly Pharmacy gets a target raise from iA Capital

Chelsea Stellick of iA Capital Markets remains bullish on community pharmacy company Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Chart, News, Analysts, Financials TSX:NBLY), maintaining her “Buy” rating while raising her target price to $36.00/share from her previous $31.00/share on Wednesday.

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.

Stellick’s updated analysis comes after Neighbourly announced its financial results for the second quarter of its fiscal 2022 as well as announcing the acquisition of five Western Canadian pharmacies.

The company’s quarterly financials were headlined by $90.7 million in revenue, which constitutes a 54 per cent year-over-increase, though the figure did come in slightly below expectations set by both the consensus ($92.5 million) and iA Capital Markets ($92.7 million).

While Stellick also noted that same store sales only increased by 1.2 per cent in the quarter, same store prescriptions increased by 2.9 per cent despite net new prescriptions remaining below pre-pandemic levels, with Stellick relating that the company believes its same store growth rates should normalize going forward as opposed to being thoroughly affected by COVID-19.

“Neighbourly’s ability to continue executing its growth strategy is dependent upon two factors: A robust acquisition pipeline and a strong capital foundation,” said Chris Gardner, Chief Executive Officer of Neighbourly Pharmacy in the company’s financial release on October 26. “Acquisition opportunities in Canada remain abundant, with more than 3,600 independent pharmacies across the country that meet our criteria. At the same time, our recently completed $30 million treasury offering of common shares provides us with even greater financial flexibility to pursue opportunities within this pipeline. As a result, we have never been more confident in Neighbourly’s future.”

Just before announcing its quarterly results, Neighbourly acquired five pharmacies in Alberta and British Columbia for $21 million in cash, with Stellick noting that the new acquisitions should bring $3 million in annual adjusted EBITDA.

This set of acquisitions follows a separate acquisition of 20 pharmacies in Alberta, including a central fill pharmacy and a compounding pharmacy, valued at $41 million with $7 million in annual adjusted EBITDA, with Stellick noting that Neighbourly has now added 40 pharmacies to its network in its 2022 fiscal year, well ahead of its annual average of 35.

“This acquisition further reinforces Neighbourly’s strong position within Western Canada,” Gardner said in a separate October 26 release announcing the deal. “It also represents the continued execution of the Company’s acquisition strategy, which has expanded our network by 40 pharmacies since the beginning of our fiscal year. These new locations act as critical healthcare providers within their communities, and we look forward to welcoming their dedicated teams to the Neighbourly family.”

In addition, the company also recently closed its previously-announced treasury and secondary bought deal offering of nearly a million common shares at $30.75/share.

The results and acquisitions have prompted a few changes to Stellick’s financial projections for Neighbourly, headlined by a new revenue target of $472.3 million for 2022 (previously $462.2 million), which would be a potential year-over-year increase of 54.1 per cent over the $306.5 million in revenue projected in 2021, which in itself represented a year-over-year increase of 64.3 per cent.

Stellick’s 2022 adjusted EBITDA projection also steps up, as she now projects $74.9 million instead of $69 million for a margin of 15.9 per cent, compared to the 2021 projection of $35.1 million and a margin of 11.5 per cent.

The key trading multiples continue to tell a positive story for Neighbourly; despite Stellick projecting a jump in the EV/Revenue to 3.6x in 2021 from the 1x reported in 2020, she expects that to fall down to 2.3x in 2022. Meanwhile, Stellick’s EV/adjusted EBITDA projections have Neighbourly dropping from the reported 51.8x in 2020 to a projected 31.2x in 2021, then to a projected 14.6x in 2022.

Stellick also notes that the company’s pro forma annual revenue including recently integrated acquisitions is now at $484 million and annual pro forma Adj. EBITDA is $60.3 million.

“Despite a miss on Q2/F22 earnings, the net impact of announcements made today by NBLY is positive due to the strong M&A growth in Q3/F22 which accelerates NBLY’s growth plan,” Stellick said. “We believe incremental M&A can make the most of Neighbourly’s increasingly powerful competitive advantage of operating leverage through consolidation which will translate to gradually improving EBITDA margins over time.”

Overall, Neighbourly’s stock price has been friendly to investors in 2021, producing a 37.8 per cent return for the year to date with a high point of $33.37/share coming on September 3. At the time of publication, Stellick’s new $36.00 target represented a projected 12-month return of 15.1 per cent.