For regular readers of the Breakouts report, it will return next week.
In the meantime, featured today is a newly listed stock. As a result, it does not have enough trading history in order to appear on the breakouts list even though the share price has rocketed higher. Discussed today is Neighbourly Pharmacy Inc. (NBLY-T).
On July 14, the share price closed at $28.55 - a 68 per cent increase from its May IPO [initial public offering] price of $17. Given this parabolic move higher, investors may want to put this stock on their radar screens but wait for the share price to potentially pullback to the mid-$20s price level. It’s a stock to watch but you don’t have to chase it.
A brief outline on Neighbourly is provided below that may serve as a springboard for further fundamental analysis when conducting your own due diligence.
The company
Toronto-based Neighbourly is Canada’s third largest pharmacy chain. Neighbourly operates 146 pharmacy stores across the country.
In terms of its geographic breakdown, according to its May 2021 investor presentation (when it had 145 locations), the company has stores in Ontario (51 locations), B.C. (48 stores), Alberta (31 stores), Saskatchewan (6 locations), Manitoba (3 locations), the Maritimes (5 stores), and one pharmacy in the Northwest Territories.
The company has two store formats. Of the 145 locations detailed in the investor presentation, 82 (57 per cent) are community pharmacies and 63 (43 per cent) are clinical pharmacies. Community stores are located in small communities with populations of less than 100,000, which face less competitive pressures. Clinical stores are located at or near medical facilities such as hospitals, clinics, and medical offices.
Neighbourly has two main revenue segments: pharmacy and front store. For the 40 weeks ended Jan. 2021, 77 per cent of total revenue stemmed from pharmacy sales (i.e. prescription sales) with the balance, 23 per cent, from front shop sales (i.e. sales of other items in the store such as beauty products).
Investment thesis
· Aging population. Supports growth in prescription sales. On the recent earnings call, the CEO remarked that 6.8-million Canadians are over 65 years old with that number expected to increase to more than 10-million over the next 15 years.
· No dominant market player. This presents plenty of acquisition targets for Neighbourly. To illustrate, Shoppers Drug Mart and Rexall have a combined market share of approximately 16 per cent. Neighbourly’s market share is estimated at just 1 per cent.
· Seasoned leadership. The chief executive officer Chris Gardner has extensive experience in the pharmaceutical industry and was formerly the vice-president of national operations at Shoppers Drug Mart.
· Operates in less competitive rural markets.
· Revenue growth fueled by acquisitions. The company expanded its number of pharmacies by 40 in fiscal 2021 (39 acquisitions and one newly built site). For the last two fiscal years, the company has completed an average of 35 acquisitions per year. On the recent earnings call, management indicated that they expect this growth rate to continue.
· Margin expansion.
· Strong balance sheet. At the end of fiscal 2021, net debt-to-pro-forma adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) stood at 1.3 times. Management targets a leverage ratio of approximately 2.5 times but can go up to 3.5 times.
· Risks to be aware of: 1) valuation – the stock price has appreciated 68 per cent from its initial public offering price of $17, and 2) lower prescription drug prices, which are regulated by the Patented Medicine Prices Review Board (PMPRB).
Quarterly earnings results
For the fourth quarter of fiscal 2021 (the fiscal year-end was March 27), the company reported revenue of $83.3-million, up 58 per cent year-over-year from $52.8-million reported during the same period last year. Adjusted EBITDA was $9-million, up 115 per cent year-over-year from $4.2-million reported last year. The adjusted EBITDA margin improved to 10.8 per cent, up from 7.9 per cent last year. Same-store sales increased just 0.4 per cent due to unusually high purchasing activity experienced last year when coronavirus cases were high and people were stocked up on their medications.
The company will be releasing its first quarter fiscal 2022 financial results before the market opens on Aug. 3. That day, management will host an earnings call at 8:30 a.m. (ET). Investors can listen to the call by dialing 1-888-664-6383.
Dividend policy
The inaugural quarterly dividend is expected to be paid in September to shareholders of record on Aug. 17. The first dividend will be for 1 cent per share.
Going forward, the company anticipates the annualized dividend will be 18 cents per share, equating to a current annualized yield of 0.6 per cent.
Analysts’ recommendations
In June, five analysts initiated coverage on Neighbourly, of which two issued buy recommendations and three issued neutral recommendations.
· BMO’s Peter Sklar has a target price of $28.
· Desjardins’ Chris Li has a target price of $27.50.
· iA Securities’ Chelsea Stellick has a target price of $28.
· RBC’s Irene Nattel has a target price of $28.
· Scotiabank’s Patricia Baker has a target price of $32 – the high on the Street.
Financial forecasts
According to Bloomberg, the consensus revenue estimates are $444-million for fiscal 2022, up 45 per cent from $306.5-million reported in fiscal 2021, rising 20 per cent to $535-million in fiscal 2023. The consensus adjusted EBITDA estimates are $51-million for fiscal 2022, up from $35.1-million reported in fiscal 2021, and $68.8-million in fiscal 2023.
Valuation
Analysts commonly value the stock on an enterprise value-to-EBITDA multiple basis.
Target prices are clustered together. The average one-year target price is $28.70, suggesting the stock is currently fully valued.
Chart watch
Technical analysis is limited due to the stock’s brief trading history.
The stock began trading on the Toronto Stock Exchange on May 25. Since then, the share price has made a parabolic move, rising an astounding 68 per cent from its initial public offering price of $17.
The stock has a major ceiling of resistance around $30. On July 8, the share price closed at a record high of $29.66.
With a market capitalization just below the $1-billion mark, this small-cap stock can be thinly traded. As a result, the share price can be volatile. To illustrate, less than 50,000 shares traded each day last week. The intraday volatility can also be high. On July 12, the share price traded between $28 and $30, a 7 per cent intraday trading range.
Please note that this report is not an investment recommendation. This report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis on a security to provide readers with more information.
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