Opinions
Stockchase Insights
Neighbourly Pharmacy Inc
NBLY-T
TRADE
Dec 18, 2023
Stock price when the opinion was issued
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Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. The revenues were short of estimates but the additional IPO cost is not surprising. New pharmacies are contributing to 55% revenue gains. The stock remains above IPO prices. Unlock Premium - Try 5i Free
Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. There is no news that would change fundamentals. It is trading at 48x earnings, so it is expensive and the market is not liking high valuation names right now. Would not buy on the negative momentum. Wait for confirmation of an uptrend before considering. Unlock Premium - Try 5i Free
NBLY has not been a public company for very long (IPO'd in mid-2021), but its growth rates are strong, and while it is not yet profitable, it is on the cusp of becoming profitable. Its forward P/E is now fairly high at 31.3X, but its price to book is 1.2X and its forward sales multiple is cheap at 0.8X. It has a ~5.7% free cash flow yield and its balance sheet is strong. With a net profit margin of ~(2%), if sales growth continues at a fast pace and it becomes profitable, we believe that its strong fundamental base can begin to be appreciated by investors. We do not like the negative momentum recently, but we believe it has a lot to offer and it is now nearing its book value. In a rising interest rate environment, unprofitable names are still not investors' number one preference, but we expect NBLY's high growth rates to be a tailwind over the long-term.
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The small pharmacy market in Canada is fragmented. Despite record results, growth by acquisition stocks are out of favour now because of higher interest rate concerns over too much debt. However they can easily cover their interest payments. Since their IPO a couple of years ago revenues and profits have more than doubled. It has a great runway for growth with improving margins and free cash flow and he is adding to his position. It is at an all time low valuation at 9X EBITDA.
The company has only been public for 30 months, so management is still on probation, at least publicly. The recent privatization 'flip flop' certainly docks them some points. And, having gone public at $17 and then (proposed) private at $18.50 doesn't make that much business sense to us. BUT...management likely sees the potential for the future moreso than investors, and we can't blame them for trying to take advantage of the low price in the market if prospects are so good. It leaves a bad taste, sure, but that's business. In a failed deal we would expect the stock to drop to the $14 range. The difference vs prior is due to the much improved market/rate backdrop. It will still have potential from there, certainly, but it is sometimes difficult for shareholders to support a management team that clearly 'wants to go private'. Thus, we would not expect a huge uptick in valuation multiples, but it could still do well with organic growth and acquisitions.
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We are not happy with the adjustment in price but we think it is more likely to close at the lower price now. If the deal was in jeopardy, we think it would have been cancelled today rather than seeing a price adjustment. We would consider it an OK arbitrage from here, but investors have a right to be even more skeptical now. Market conditions have significantly changed for the better since the deal was first announced, so the downside risk on no deal has likely decreased a little as well (from current levels, at least).
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