Neighbourly Pharmacy already has growth priced in, says iA Capital

Chelsea Stellick of iA Capital Markets is still passing on Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Chart, News, Analysts, Financials TSX:NBLY), maintaining a “Hold” rating and target price of $36/share for a projected return of 13.8 per cent in an update to clients on Friday.

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 with a preview of the company’s third quarter results for the 2022 fiscal year, which are due to be released on February 15. As of now, Stellick’s projection is for Neighbourly to hit $145 million in revenue in the quarter with $17 million in adjusted EBITDA, implying a margin of 11.7 per cent.

Neighbourly experienced a busy quarter from a merger and acquisition standpoint, having announced a $41 million acquisition of 20 pharmacies in Alberta, which was funded by cash the company had on hand. The deal included a central fill pharmacy and a compounding pharmacy, with the total acquisition expected to bring in $7 million in adjusted EBITDA annually after factoring in an additional acquisition of an independent pharmacy.

The company continued its regional theme with the acquisition of an additional five pharmacies in British Columbia in Alberta for $21 million, also paid through cash the company had on hand, with an expectation for these locations to produce an additional $3 million in adjusted EBITDA annually.

According to Stellick, the acquisitions put Neighbourly on track to hit its acquisition goals, having added a total of 40 pharmacies to its network in the 2022 fiscal year to date.

“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, CEO of Neighbourly Pharmacy in the company’s October 26 press release. “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.”

Stellick also projects Neighbourly will have a formidable quarter in relation to the flu season, primarily on account of an uptick in vaccines administered during the Omicron wave of COVID-19. According to data from the Government of Canada, October (42 per cent) and November (38 per cent) have been the busiest months in terms of when flu shots have been administered.

From a location perspective, data from the same period shows 49 per cent of flu shots have been administered at pharmacies, compared to just 23 per cent being given in doctor’s offices.

”Canada’s goal is to achieve 80 per cent influenza vaccination coverage for people at higher risk of complications from the flu, so there is potential to move up from the current 41 per cent coverage for those with chronic medical conditions,” Stellick said.

Stellick has made slight revisions to her financial estimates for 2022 to account for the timing of the closing on Neighbourly’s recently acquired pharmacies, lowering her revenue target from $472.3 million to $441.6 million, with the new projection representing a year-over-year increase of 4.1 per cent. Stellick has also reduced her adjusted EBITDA estimate from $69 million  to a $51.2 million.

Meanwhile, Stellick also introduced 2023 projections, setting revenue at $565.6 million for a forecasted year-over-year increase of 28.1 per cent. She also projects the company’s adjusted EBITDA margin to grow to $73.3 million with an implied margin of 13 per cent.

In terms of valuation, Stellick projects the company’s EV/Revenue multiple to climb from 1x in 2021 to 2.6x in 2022, then dipping to a forecasted 2.1x in 2023. Meanwhile, she projects the company’s EV/adjusted EBITDA to consistently drop from 33.1x in 2021 to a forecasted 22.7x in 2022, then to a projected 15.9x in 2023.

“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,” Stellick said in her overall assessment of the company’s future prospects. “However, given that the market is pricing in substantial acquisitive growth ahead of those acquisitions being announced we maintain our Hold rating.”

Neighbourly Pharmacy’s stock price has been 19 per cent to the negative to begin 2022, though the longer-term has produced better results with a 40.7 per cent return over the last 12 months. Neighbourly hit a 52-week high on New Year’s Eve at $39.94/share, and is still above its 52-week low of $22.49/share on May 25.