Highlights

Founded in 1994 by a handful of registered pharmacists, the Caring Pharmacy Group (Caring) is primarily an operator of a chain of community pharmacies.

As at April 2014, the group has a total of 97 pharmacies nationwide. In terms of number of outlets, Caring is ranked third after Cosway and Guardian, with an estimated market share of 4%. No single operator controls more than 7% of the market. Within Klang Valley, Caring has a share of 8%.

Forecasts

As part of the group’s expansion plan, Caring is targeting to have a total of up to 120 outlets by 2016, from the current 97 outlets. Our forecasts project the setting up of 12-13 new outlets per annum in FY2015F and FY2016F, which is expected to underpin double-digit prospective revenue and earnings growth, based on our estimates.

Catalysts

Successful implementation of outlet expansion plans over the next few years to sustain medium to longer-term growth.

Ability to gain market share by being the only community pharmacy chain providing full-time registered pharmacists at all outlets during retail hours.

Separation of prescribing and dispensing of scheduled and OTC drugs.

Risks

Delays in outlet expansion plans, which are dependent on the availability of ideal locations and registered pharmacists.

Keen competition from other pharmacy chains such as Cosway, Guardian and Watsons.

Rating

Initiating coverage with BUY call.

Positives:

1) An established and trusted pharmacy chain with reliable service and competitive product pricing;

2) Unlike its competitors, all Caring pharmacies have full-time registered pharmacists throughout retail operating hours;

3) Caring’s network of outlets benefits from economies of scale and shared services, resulting in more efficient use of retail space and competitive pricing of products & services.

4) Caring is the only pure retail pharmacy chain listed locally.

Negatives:

1) Higher working capital requirements and start-up costs for new outlets; and

2) Shares are tightly held currently, resulting in relatively low trading volumes.

Valuation

Based on our earnings estimates, Caring is currently trading at prospective PE ratings of 13-14x over FY2015F-FY2016F.

Assuming an FY2015F PER of 17x, which is on par with other domestic market-oriented retail pharmacy chain operators in the region, we arrive at a price target of RM2.40 per share for Caring. We therefore initiate coverage on the stock with a BUY recommendation.

Source: Hong Leong Investment Bank Research- 18 Apr 2014