Neighbourly Pharmacy Inc. (TSX:NBLY, Financial) is a retail pharmacy consolidator in Canada, focusing on small towns and rural markets. The company has a roll-up strategy based on acquiring and integrating pharmacies across the country. Neighbourly Pharmacy leverages analytics, pricing and merchandising techniques to enhance same-store performance and profitability. It also benefits from the growing national network and a platform that provides purchasing power and economies of scale.
The company's pharmacies are trusted sources of care and advice for their patients, who rely on them for prescription medication and clinical services. Unlike major retail pharmacy chains, Neighbourly's pharmacies generate most of their revenue from pharmacy services rather than retail sales. Its competitive advantage is based on its service-oriented culture and strong relationships with patients and pharmacy owners.
Neighbourly Pharmacy is well-positioned to capitalize on the increasing demand for prescription drugs and pharmacy services from the aging Canadian population as well as the trend toward pharmacists providing more clinical services like vaccinations, diagnosis and treatment for minor self-limiting health conditions like urinary tract infections, tick bites, pinkeye, cold sores and dermatitis.
The company, which has 291 stores across seven Canadian provinces, focuses primarily on serving rural communities, where it offers a wide range of products and services, including prescription drugs, over-the-counter medications, health and beauty products and home health care supplies. In contrast to major national retail pharmacy chains, Neighbourly operates in a unique segment of the market that is characterized by differences in both geographic profile and sales mix. Approximately two-thirds of its pharmacies are located in communities with a population of less than 100,000 inhabitants. These communities are typically underserved and subject to less intense competition.
Neighbourly Pharmacy aims to grow its market share by acquiring smaller pharmacy chains and individual stores and improving its operational efficiency and customer loyalty. The company has a resilient business model that benefits from the aging population and the expanding role of pharmacists in the health care system.
The company went public in early 2021 at 17 Canadian dollars ($12.92) per share and reached a high of nearly CA$40 before falling back to the high teens, where it is now. It raised more capital at CA$30 per share in October 2021 with significant insider participation in order to fund a large acquisiton of 100 pharmacies from Rubicon Pharmacies. A total of 4,864,500 of Neighbourly common shares were sold, including 634,500 common shares following the full exercise by the underwriters of their over-allotment option at a price of CA$30.75 per share. Persistence Capital Partners, a Toronto-based private equity firm, owns or controls approximately 50% of the company's issued and outstanding common shares.
Source: Company presentation
The Canadian retail pharmacy landscape is highly fragmented. More than half of the country’s approximately 11,500 pharmacies are independently owned. Neighbourly has capitalized upon this consolidation opportunity by acquiring and integrating 112 locations during fiscal 2023. The company’s management has extensive experience in retail pharmacy, mergers and acquisitions and consumer retail. This expertise has facilitated the development of a model that allows it to rapidly source, close and seamlessly integrate acquisitions. Transactions are frequently completed within eight weeks of signing a letter of intent, and pharmacies are fully integrated into the company’s point of sale and procurement systems within 24 hours of closing, with minimal disruption to patients and staff. This approach, combined with alignment of patient-centric values and a deep respect for the pharmacy’s legacy and role in the community, positions it as an acquirer of choice. As a result of this position and a robust acquisition pipeline, the company anticipates continuing to acquire pharmacies at a rate similar to historical levels prior to the CA$439.89 million acquisition of Rubicon last year
Source: Company presentation
Income and cash flow
The company reported strong financial results for the fiscal year ending in March, with decent same-store sales growth of 1.6% and improved margins despite the Covid-19 pandemic receding. The company's annualized revenue and adjusted Ebitda are around CA$749 million and CA$79.2 million.
The stock is trading at an attractive valuation of about 10 times Ebitda, given its solid growth, profitability and cash flow generation. While the company is showing a GAAP loss of CA$15 million, it is generating strong free cash flow of CA$41 million as shown in the chart below. In 2022, free cash flow was only CA$7 million, so the company has managed to grow FCF by several multiples from last year.
The company is continually acquiring pharmacies and bringing them onto its platform. As pharmacist-owners retire, this is an attractive way for them to monetize their businesses.
Balance sheet
Neighbourly's balance sheet remains well positioned to continue to fund acquisition strategy with approximately CA$151 million of undrawn debt capacity. Current leverage (net debt / adjusted Ebitda) is 3.5 times. The company says the long-term leverage target remains at 2.5 times.
Profit Margins
Neighbourly's profit margins compare well against its far bigger North American rivals. Most pharmacy chains are part of far larger discount or grocery retailers.
| Exchange | Symbol | Company | Gross Margin % | Operating Margin % | Net Margin % | EBITDA margin | FCF Margin % |
| TSX | NBLY | Neighbourly Pharmacy Inc | 39.07 | 1.94 | -2.07 | 9.45 | 5.43 |
| NYSE | WMT | Walmart Inc | 24.09 | 3.43 | 1.82 | 4.86 | 3.13 |
| TSX | MRU | Metro Inc | 19.96 | 7.02 | 4.56 | 9.50 | 4.64 |
| TSX | L | Loblaw Companies Ltd | 31.90 | 5.89 | 3.32 | 10.86 | 5.43 |
| NYSE | CVS | CVS Health Corp | 16.41 | 4.79 | 1.20 | 3.64 | 5.26 |
| NYSE | RAD | Rite Aid Corp | 19.94 | -0.41 | -3.11 | -1.06 | -1.25 |
| NAS | WBA | Walgreens Boots Alliance Inc | 19.84 | -5.53 | -2.44 | -2.30 | -0.60 |
Insider buys
On June 15, Stuart Elman, the chairman of the board of directors, bought 33,707 shares at a price per share of $17.78. The cost of this investment totaled more than $599,000. Elman is a principal of private equity firm Persistence Capital, which controls Neighbourly.
Conclusion
The Canadian retail pharmacy industry is stable, economically resilient and possesses a strong outlook over both the near and long term. Unlike the US, Canadian Pharmacies do not face pricing pressures from PBM's (Pharmacy Benefit Managers) and on-line pharmacies. Neighbourly is focused on capitalizing on demographic and macro tailwinds, including both an aging population and pharmacists’ growing scope of practice, which allows for the provision of additional services under existing staffing models.
Neighbourly maintains an active acquisition funnel, comprised of both multi-store and single store tuck-in acquisitions, which the company believes represent a significant opportunity for future transactions. Neighbourly appears to be well capitalized and retains the financial flexibility to continue to execute upon these acquisition opportunities.
Currently, the stock is selling for below its initial public offering price, so I believe it is considerably undervalued given its potential. The stock is recession resistant and provides shelter from the tech-driven rebound bubble we are in currently, which will likely burst sooner rather than later.
A discounted cash flow analysis with the GuruFocus DCF calculator using free cash flow per share as a starting point indicates the stock is attractively priced. However, given the lack of a long track record, this is only a very rough estimate.
The six analysts following the company, consolidated by Tipranks, predict a 12-month average price of $25.17. I think this is achievable.
