Highlights/ Comment

• We met up with the management recently to get an update post 2QFY15 results. We are negative on its near to medium term prospects and we feel there will be more downside risks on its expansion plan and profit margin will be compressed further.

• For the next quarter, Caring shared that earnings could be slightly better than the first two quarters as 3Q has traditionally been the strongest quarter for the group (circa 40% of full year earnings). However, in view of the group’s expansion plan, its operating expenses are expected to remain high over the medium term.

• Despite overaggressive expansion, its target to achieve 120 Caring outlets by 2016 is intact. Location wise, instead of expanding in the more competitive Klang Valley area, Caring will be diverting its focus on primary cities that are less saturated such as Melaka, Penang, Seremban and Ipoh. Sales were affected when the group opened its outlets in competitors’ zone.

• Gestation period for the new outlets has increased from the usual average of 12 – 18 months to 18 – 24 months. In FY15, Caring has closed down 2 outlets, in SS12 Mall (shopping complex outlet) and Tesco Puchong (specialised retail centres). We feel that Caring should concentrate on bringing the unprofitable outlets to the black before expanding further.

• The group plans to develop its own E-commerce site either in 4QFY15 or 1QFY16. Caring is currently using Lazada and Rakuten as their E-commerce platform.

Risks

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

Forecasts

• We cut FY15, FY16 and FY17 EPS by circa 18% to 20% to reflect lower profit margin and higher operating expenses.

Rating

SELL , TP: RM0.87

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 target price of RM0.87 (-15% from RM1.00), reflecting our EPS downward revision.
• This is derived based on the updated multiple of 16.6x CY16 EPS, 2x discount to the average of other domestic marketoriented retail pharmacy chain operators in the region.

Source: Hong Leong Investment Bank Research - 11 Mar 2015