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Neighbourly Pharmacy has target trimmed by iA Capital

New quarterly results are presenting a few bumps in the road for Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Charts, News, Analysts, Financials TSX:NBLY), a Canadian company focused on consolidating the independent community pharmacy space. But in a Wednesday report iA Capital Markets analyst Chelsea Stellick says investors should be looking at the longer-term picture on Neighbourly, where the growth-oriented company still has a good-looking game plan.

Toronto-headquartered Neighbourly Pharmacy currently has 275 locations across the country and is Canada’s largest network of community pharmacies. The company announced its first quarter fiscal 2023 financials on Tuesday, showing revenue up 34 per cent to $114.4 million and adjusted EBITDA up 11 per cent to $11.3 million. Adjusted earnings were $0.09 per share compared to $0.07 per share a year earlier.

Over the quarter, Neighbourly’s big move was to close on the acquisition of 100 stores under the Rubicon Pharmacies name, bought for $435.0 million, while the company also acquired three new locations and opened one new Greenfield location in a hospital setting.

“Neighbourly’s first quarter results reflect our continued focus on executing against our strategy, adding 100 locations with the closing of the Rubicon Acquisition and the addition of another 4 locations. I would like to officially welcome the Rubicon team to Neighbourly,” stated Chris Gardner, CEO, in a press release. “I believe that our businesses are stronger together and with our shared vision, and approach to community care, our teams will be positioned to be a leader in health care for decades to come.”

But the quarterly results revealed some short-term headwinds, according to Stellick. The $114.4 million topline was a little under expectations, where Stellick was calling for $116.4 million and the consensus estimate was $115.9 million. Adjusted EBITDA at $11.3 million was also under Stellick’s $12.2 million and the Street’s $12.4 million.

Stellick said same store sales growth was a small 0.4 per cent, while the adjusted EBITDA was flat sequentially and produced a lower margin of 9.8 per cent compared to 10.1 per cent in the previous quarter due to weak new prescription growth, higher labour costs and a 39 per cent clinic pharmacy mix increased the high-price, low margin prescriptions as a percentage of revenue. 

But the future appears to be brighter, according to Stellick, starting with the onboarding of Rubicon’s stores next quarter.

“We are confident these ~10% Adj. EBITDA margins of this quarter and last represent the bottom for margins, given that Rubicon will immediately benefit margins in Q2/F23 as synergies are implemented and corporate costs are diluted as a percentage of revenue,” Stellick wrote.

“Management suggested next summer as the end of the pharmacist labour shortage when the next cohort of more than 1K newly trained pharmacists enter the workforce. Another positive catalyst may be the proposed reduction to virtual care reimbursements effective September 2022 in Ontario, which may increase in-person visits and new prescriptions. Management defended the clinic format as a diversifier for the business despite it causing a drag this quarter, noting that these locations are completely recession proof given the minimal front shop component,” she said.

Incorporating the quarterly results into her estimates and valuation, Stellick is now calling for Neighbourly Pharmacy to deliver full fiscal 2023 revenue of $770.0 million compared to $427.5 million in fiscal 2022 and moving to $933.0 million for fiscal 2024. On earnings, the analyst is calling for $83.2 million for 2023 compared to $45.9 million for 2022 and moving to $114.4 million by fiscal 2024.

On the key trading multiples, Stellick is forecasting NBLY’s EV/Revenue to go from 1.0x in fiscal 2022 to 1.2x for 2023 and to 1.0x for 2024, while on EV/Adjusted EBITDA the call is for 19.6x in 2022 to move to 10.8x for 2023 and to 7.9x for 2024.

Neighbourly’s share price has been slumping since the start of the year, with the stock dropping further on the release of the Q1 earnings on Tuesday. NBLY started 2022 at just under $40 per share and is now trading in the low $20 range. 

But Stellick sees upside from here, even as she has trimmed her 12-month target price due to what she calls the uncertainty of timing regarding Neighbourly’s execution of its roll-up strategy.

“We view its roll-up strategy as having staying power and therefore garners a premium to peer valuations in the short and medium-term as a result of the growth rate associated with expected acquisitions. However, given the persistence of current transient headwinds, we maintained a premium but reduced the size of the premium for NBLY’s multiples,” Stellick wrote.

With the update, Stellick has reiterated a “Buy” rating on Neighbourly while lowering her target from $38.00 to $35.00, which at the time of publication represented a projected one-year return of 66.5 per cent.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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