Highlights

We have fine-tuned our earnings estimates and revised down our earnings projections by 12%, assuming higher projected operating expenses (from the aggressive expansion plan) and also toned down our previous estimates for purchase rebate entitlements from suppliers.

Operating expenses are expected to remain high over the medium term, in view of the group’s outlet expansion plans, targeting to open 12-15 new outlets per annum.

Aside from higher projected selling and distribution expenses, we have rejigged our assumptions to assume higher administrative expenses as the group is moving into its new headquarters and warehouse in Petaling Jaya by the middle of 2014.

We are already projecting lower average revenue per outlet going forward given that new outlets require a gestation period of 12-18 months on average.

With regards to purchase rebate entitlements from suppliers, these are classified under other operating income and relate to cash incentives from suppliers for achieving certain set sales targets. Contrary to our earlier assumptions, the rebates are largely paid out at the end of a calendar year which is Caring’s financial year 3Q. As such, we are no longer projecting similar amounts of purchase rebates in Caring’s 4QFY2014 results.

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 Guardian and Watsons.
• Slowdown in consumer discretionary spending.

Rating

BUY

Valuation

Despite the forecast revision, Caring remains attractive, trading on 16.4x PER to FY05/15 and 14.5x PER to FY05/16.

Our BUY call is maintained with an unchanged price target of RM2.40 per share despite the lower forecasts, which implies a target CY15 PER of 18x (vs. 17x FY05/15 previously), in line with other domestic market-oriented retail pharmacy chain operators in the region.

Source: Hong Leong Investment Bank Research - 6 May 2014