Neighbourly Pharmacy heading to $40/share, says iA Capital

Small cap name Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Chart, News, Analysts, Financials TSX:NBLY) hit just under $40 per share this past December before tumbling a long way, but despite the losses iA Capital Markets analyst Chelsea Stellick sees the stock heading back to those heights. In a new report, Stellick maintained a “Buy” rating and $40/share target price on NBLY which translated at the time of pubication to a projected 12-month return of 60.9 per cent.

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 updated analysis comes after Neighbourly Pharmacy received Competition Bureau approval for the $435 million acquisition of Rubicon Pharmacies through a no-action letter, eliminating a key roadblock ahead of the expected June 27 transaction closing date.

“This agreement with the Competition Bureau is in line with our understanding of the Canadian pharmacy competitive landscape, given that NBLY remains at less than three per cent market share even following the Rubicon acquisition,” Stellick said in a June 8 rep0rt. “We see no risk to further expansion from an antitrust perspective given the low market share and larger competitors such as Shoppers Drug Mart and Rexall.”

In Rubicon Pharmacies, Neighbourly will be adding a net 100 pharmacies to its network, as the company sold two of its pre-existing locations.

The deal is a significant addition to the Neighbourly family in the form of a 70 per cent earnings run-rate increase, said Stellick, as Rubicon has trailing 12-month revenue of $303 million. Stellick also forecasts the transaction to add $41 million in adjusted EBITDA to Neighbourly’s books, including $2.7 million worth of synergies.

The transaction brings Neighbourly to an anticipated leverage ratio of approximately 3× net debt to pro forma adjusted EBITDA at close, well within range of the long-term target of 2.5×, with Stellick believing it could be easily de-leveraged through free cash flow if the acquisitions were to slow down while management focuses on integration.

“We are pleased that the Competition Bureau has concluded its review of this combination of Canada’s community pharmacy leaders,” said Chris Gardner, Chief Executive Officer of Neighbourly Pharmacy in the company’s June 7 press release. “The acquisition of Rubicon will ideally position Neighbourly to continue to grow its presence across Canada and expand its role as a leader in community pharmacy.  Rubicon’s pharmacies 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.”

With official approval now in place, Stellick has revised her financial projections for the company, lowering her 2022 revenue forecast from $428.7 million to $424.8 million for a potential year-over-year increase of 38.6 per cent, then lowering her 2023 forecast from $849.7 million to $788.1 million for a potential year-over-year increase of 84 per cent. However, she also raised her 2024 forecast from $940.3 million to $945.6 million, suggesting a year-over-year jump of 20 per cent.

In terms of valuation, Stellick forecasts a minor blip in the EV/Revenue multiple at 1.2x in 2023, with a 1x projection in place for 2022 and 2024.

Stellick also slightly lowered her 2022 adjusted EBITDA forecast from $45.1 million to $44.8 million for an implied margin of 10.5 per cent. Looking to 2023, Stellick forecasts a lower adjusted EBITDA of $101.5 million (previously $108.3 million) for an implied margin of 12.9 per cent, with a slight raise to $125.6 million in 2024 for an implied margin of 13.3 per cent.

From a valuation perspective, Stellick forecasts the company’s EV/adjusted EBITDA multiple to be 21.4x in 2022, with a potential drop to 9.4x in 2023, followed by a forecasted dip to 7.6x in 2024.

For investors, Stellick forecasts a $2.49/share EPS loss in 2022 (previously a $2.48/share loss) before shifting to a projected return of $0.65/share in 2023 (previously $0.63/share), then growing to a projected $1.01/share in 2024 (previously $1/share).

Going forward, Stellick believes the transaction cements Neighbourly as the leading and fastest-growing pharmacy acquirer in Canada.

“There remain around 3,600 potential acquisition targets across Canada with no antitrust risk, and we expect continued aggressive expansion during and following the integration of Rubicon,” Stellick said. “We foresee a significant negative omicron wave impact in Q4/F22 on revenues and expenses but note this will be a one-time phenomenon as we expect a bounce back in Q1/F23, both operationally and with continued favourable YoY comparisons through F2023 as acquisitions layer into the financials.”

Neighbourly Pharmacy has seen its stock price fall by 37.1 per cent in 2022, consistently dropping after starting the year trading at $39.09/share, falling as low as $23.90/share on May 11.