iA Capital lowers target on Neighbourly Pharmacy, keeps Buy rating

iA Capital Markets analyst Chelsea Stellick delivered a report to clients on Tuesday on Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Charts, News, Analysts, Financials TSX:NBLY), where she reviewed the company’s latest quarterly results. Stellick maintained a “Buy” rating on the stock while lowering her target price from $35.00 to $33.00 for a projected return at the time of publication of 41.4 per cent.

Toronto-based Neighbourly, which owns Canada’s largest network of independent pharmacies, now with 284 locations, announced its Q2 fiscal 2023 results on Tuesday, showing revenue up 97.3 per cent to $178.9 million and adjusted EBITDA up 98.3 per cent to $19.8 million. It was the company’s first reported quarter to include the major acquisition of Rubicon Pharmacies for $435 million, completed in June. 

“Neighbourly’s second quarter results reflect the strength and resilience of our underlying business and the continued focus on executing against our acquisition strategy. Since closing on Rubicon, we have once again accelerated our acquisition momentum, adding one new location in the second quarter and welcoming 8 additional locations to Neighbourly in November,” said Neighbourly CEO Chris Gardner in a press release.

The fiscal Q2 topline of $178.9 million was a little under expectations, with Stellick’s forecast at $182.8 million and the consensus estimate at $180.7 million. But adjusted EBITDA was a slight beat at $19.8 million compared to Stellick’s $19.3 million, with the Street’s call at $19.8 million.

Stellick said the company’s margins are still being impacted by temporary pharmacist relief costs but that progress is evident, pointing to vacant pharmacy positions which were down by 25 per cent since the end of the second quarter. 

On the work of integrating Rubicon into its network, Stellick said Neighbourly has successfully integrated the 100 Rubicon stores and realized over 70 per cent of projected synergies from the acquisition. Stellick also noted the eight pharmacies Neighbourly acquired for $15 million after the end of the company’s fiscal Q2, which will add meaningful scale, with two new locations in BC and six in Atlantic Canada.

“NBLY’s profitability metrics improved in the quarter due to a lower proportion of clinic
pharmacies and favourable geographic segments following the integration of Rubicon.
Changes to the physician reimbursement model in Ontario and the increased scope for
pharmacists in B.C. will increase organic growth through incremental clinical services activity,” Stellick wrote.

“NBLY will continue pursuing attractive M&A opportunities and will bring its leverage ratio to the long-term target over time. We maintain our Buy recommendation and revise our target price to $33.00/share (previously $35.00/share) based on the average of 1) DCF, 2) EV/EBITDA, and 3) EV/Revenue,” she said.

Looking ahead, Stellick is forecasting full fiscal 2023 revenue and adjusted EBITDA of $766.0 million and $84.1 million, respectively.