Results

• 1H15 revenue of RM177.4m (+5.8% yoy) was translated into core net profit of RM2.6m (-63.4% yoy).

• Despite top line being broadly in line, bottom line came in way below expectations, accounting for 16.2% and 15.7% of HLIB and consensus full year estimates, respectively.

Deviations

• Lower-than-expected profit margins due to lower selling prices from market competition despite higher volume.

Dividends

• None.

Highlights

• Despite a satisfactory 1H15 revenue of RM177.4m (+5.8% yoy), PATAMI was squeezed to RM2.7m (-62.8% yoy), which was mainly due to lower economies of scale arising from lower selling prices in order to attract market share, despite higher volume.

• It is noticeable that CARiNG has been slowing down thei r expansion plan from 1Q15 onwards, with only additional of 2 new shopping complex outlets this quarter.

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

• Another note is the closing down of 1 outlet in this quarter, which is most likely due to failure in achieving breakeven after gestation period. To date, Caring has a total of 102 outlets.

• CARiNG shared that they will relook at their marketing strategies to improve sales in order to maintain market share. They remain confident that the company will continue to be profitable in the coming quarter.

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 deviations mentioned above. As a result, FY15, FY16 and FY17 EPS were reduced by circa 19% to 21%.

Rating

SELL , TP: RM1.00

Positives

• Established and trusted pharmacy chain withreliable service and competitive product pricing; full-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 fornew outlets; overaggressive expansion; intense competition impact selling prices; shares are tightly held resulting in relatively low trading volumes.

Valuation

• Maintain SELL with a lower fair value of RM1.00 (-17% from RM1.20), reflecting our EPS revision.
• This is derived based on unchanged multiple of 15.5x CY16 EPS, 2x discount to the average of other domestic marketoriented retail pharmacy chain operators in the region.

Source: Hong Leong Investment Bank Research - 28 Jan 2015