Results 

1QFY15  revenue  of  RM88.4m  (+6.1%  yoy)  was  translated into core net  profit of RM0.6m (-89.7%  yoy).

Despite  top  line  being  broadly  in  line,  bottom  line  came  in way  below  expectations,  accounting  for  2.4%  of  HLIB  and consensus full year estimates.

Deviations

• Lower-than- expected  PBT  due  to  lower  profit  margins dragged  by selling and distribution expenses .
• Slower-than-expected  outlet expansion growth.

Highlights 

Despite  a relatively consistent revenue  of  RM88.4m (+6.1% yoy,  -0.3% qoq),  PATAMI  plunged to  RM0.6m  (- 89.7% yoy, -55.2%  qoq),  which  was  mainly  due  to  the  absence  of purchase  rebate entitlements from suppliers .

It is noticeable that CARiNG is slowing down their expansion plan  with  only  additional  of  2  new  outlets  this  quarter compared to 7 new outlets last quarter. To date, Caring has a total of 101 outlets.

As mentioned previously in our report dated 15 August 2014, the  company  is  now  exercising  more  careful  discretion  in outlet  location  to  avoid  trespassing  competitors’  territories which would cause damage on their sales. This explains the slowdown  in outlet expansion  observed.

CARiNG  remains  cautiously  optimistic  going  forward  as  it expects  the  government  subsidy  rationalisation  to  dampen domestic consumption.

The company has taken  pre- emptive measures  to  retain the profitability of matured outlets as well as to turn  new outlets around.

Risks

• Overaggressive  expansion  has  resulted  in  margin compression which may continue to drag earnings  growth.
• Keen  competition  from  other  pharmacy  chains  such  as Guardian  and Watsons.
• Slowdown  in consumer discretionary spending.

Forecasts

• Updated model  based on  #p#Deviations mentioned above.  As a result, FY15,  FY16  and FY17  EPS were  reduced  by  around 30% to 35%.

Rating

SELL, TP:  RM1.20

Positives  –  Established  and  trusted  pharmacy  chain  with reliable  service  and  competitive  product  pricing;  f ull-time registered  pharmacists  available  throughout  retail  operating hours;  benefits  from  economies  of  scale  and  shared services; the only pure retail pharmacy chain listed locally .

Negatives  –  Higher  working  capital  and  start-up  costs  for new  outlets;  overaggressive  expansion;  shares  are  tightly held resulting in relatively  low trading  volumes .

Valuation

• Due to the continuous disappointment  in  delivering earnings, we  are  downgrading  our  call  from  HOLD  to  SELL  with  a lower  fair value  of RM1.20  (-38% from  RM1.94).
• This  is  derived  based  on  a  lower  multiple  of  15.5x  CY15 EPS,  2x  discount  to  the  average  of  other  domestic  marketoriented  retail pharmacy chain operators  in the region

Source: Hong Leong Investment Bank Research - 30 Oct 2014