Neighbourly Pharmacy upgraded at iA Capital

iA Capital Markets analyst Chelsea Stellick’s mind is much more at ease about Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Chart, News, Analysts, Financials TSX:NBLY), upgrading the company from a “Hold” rating to a “Buy” while raising her target price from $31/share to $40/share for a projected return of 27.7 per cent in an update to clients on Monday.

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 the company announced its largest acquisition yet, bringing Rubicon Pharmacies and its nearly 100 community pharmacies across the Prairies into the fold, which Stellick believes to be a fit for Neighbourly’s brand.

“Rubicon aligns with and complements NBLY’s existing portfolio, with mostly rural, community pharmacies as well as some urban and suburban pharmacies and clinic pharmacies,” Stellick said. “These locations are largely in uncrowded markets and the same proportion of revenue is derived from pharmacy rather than front shop sales – similar to NBLY’s existing network.”

The transaction, which comes with a $435 million price tag and is expected to close in the second quarter of 2022, allows Neighbourly to integrate a company with trailing 12-month revenue of $303 million and adjusted EBITDA of $39 million, which Stellick expects to go up through growth and nearly $2.5 million in near-term synergies, leading to a potential run-rate increase of more than 70 per cent for Neighbourly Pharmacy.

Of the company’s new Rubicon locations, eight have post offices and nine have adjacent or collocated coffee shops from established brands.

The deal itself will be financed by a $270 million issuance of subscription receipts at $28.95 per receipt, though Stellick notes that number could reach $288 million. Within that portion, between $120 million and $138 million was purchased on a private placement basis by an affiliate of Persistence Capital Partners, which holds a 49.6 per cent stake in Neighbourly Pharmacy.

Meanwhile, the remainder of the transaction is to be financed by new credit facilities supplemented by cash and sale of real estate acquired from Rubicon.

“This acquisition represents a combination of Canada’s community pharmacy leaders,” said Chris Gardner, Chief Executive Officer of Neighbourly Pharmacy in the company’s March 10 press release. “Rubicon’s locations are ideally positioned to expand Neighbourly’s presence from Manitoba to British Columbia, providing us with a significant and complementary footprint. The pharmacies within this primarily rural portfolio are similar to our own, acting as the centre of healthcare delivery for smaller, underserved communities. However, our greatest similarity is our shared values: both companies place an unmatched priority upon patient-focused care.”

The Rubicon acquisition has prompted Stellick to make major changes to her financial projections for Neighbourly Pharmacy. Looking at 2022, Stellick lowered her revenue projection from $472.3 million to $428.7 million for a year-over-year increase of 39.9 per cent, paired with adjusted EBITDA of $45.1 million (previously $69 million) for an implied margin of 10.5 per cent.

However, Stellick sees a completely different story playing out in 2023, increasing her revenue projection by 64.6 per cent from $516.3 million to $849.7 million, which presents a near doubling of revenue at a potential year-over-year increase of 98.2 per cent.

Stellick’s adjusted EBITDA projection goes up in a similar manner, rising from the previous figure of $68 million to $108.3 million for an implied margin of 12.7 per cent.

From a valuation perspective, Stellick identifies potential fluctuation in the EV/Revenue multiple with its projected rise from 1x in 2021 to 2.8x in 2022 before halving to a projected 1.4x in 2023, while she expects the company’s EV/adjusted EBITDA multiple to consistently drop from 33.9x in 2021 to a projected 26.3x in 2022, then to a projected 11x in 2023.

Overall, Stellick believes the Rubicon acquisition solidifies Neighbourly’s status as a primary acquirer of independent pharmacies.

“Neighbourly’s acquisition of Rubicon Pharmacies aligns with management’s superb track record of aggressive expansion without compromising on and executing on only the most complementary deals,” Stellick said. The addition of 100 pharmacy locations to the Neighbourly portfolio materially increases the Company’s scale and further cements the brand in Western Canada. There remain around 3,600 potential acquisition targets across Canada, and we expect continued aggressive expansion during and following the integration of Rubicon.”

Neighbourly Pharmacy’s stock has been steadily climbing to a 42.7 per cent return since it began trading on the Toronto Stock Exchange on May 25, though investors who bought in at the start of 2022 have experienced a loss of 17.9 per cent. Neighbourly opened its trading at $22.49/share in May, eventually reaching a high of $39.94/share on New Year’s Eve before coming back down to start the new year.