Results

FY14 revenue of RM338.3m (+12.3% yoy) was translated into core net profit of RM15.1m (-26.5% yoy).

Despite top line being broadly in line, bottom line came in below expectations, accounting for 68.9% and 68.4% of HLIB and consensus full year estimates, respectively.

Non-recurring listing expenses of RM1.7m was recorded in the current quarter.

Deviations

Lower-than-expected PBT due to losses arising from new outlets, lower profit margins and higher operating cost.

Dividends

Proposed a final single tier dividend of 1.5 sen per share subject to the shareholders’ approval at the forthcoming AGM.

Highlights

Despite registering a marginally higher revenue of RM88.6m (+8.1% qoq) in 4QFY14, PBT took a dip to a record of RM2.9m (-68.5% qoq). This was due to several reasons:

1. Materialisation of significant purchase rebates in 3QFY14.

2. Lower profit margins arising from marketing activities.

3. Price-cutting due to competition.

4. Higher operating cost.

5. Losses from new outlets and impairment charges on existing outlets.

Caring’s expansion plan is on track towards their target of 120 outlets by 2016 with an additional 7 new outlets in the current quarter comprising 4 shopping complex outlets and 3 street outlets. As of 31 May 2014, Caring has a total of 99 outlets.

Forecasts

Updated model based on deviations mentioned above. As a result, FY15 and FY16 EPS were trimmed by 8.5% and 8.4% respectively.

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.

Valuation

Our revision in earnings has reduced TP by 15.2% from RM2.40 to RM2.04. This is derived based on unchanged 17x CY15 EPS, on par with other domestic market-oriented retail pharmacy chain operators in the region.

Hence, we downgrade our call from BUY to HOLD, in view of the cautious consumer sentiment and increasing costs of business operation.

Source: Hong Leong Investment Bank Research - 1 Aug 2014