Results

• A strong quarter. CARiNG’s 9MFY15 revenue of RM271.3m (+8.6% yoy) was translated into core net profit of RM10.2m (-26% yoy).

• Despite top line being broadly in line, Bottom line came in way above our expectations, but in line with consensus, coming in at 94.0% and 78.4% of HLIB and consensus full year estimates, respectively.

Deviations

• (1) A seasonally stronger quarter. (2) Lower than expected operating expenses. (3) Higher operating income.

Dividends

• None.

Highlights

• CARiNG’s 3QFY15 PBT of RM10.8m achieved signi ficant growth of +267% qoq, mainly contributed by the materialisation of purchase rebate from their suppliers.

• Despite the absence of one-off listing expenses, its 9MFY15 PBT posted double digits decline, -26% yoy, due to their overaggressive expansion strategy coupled with relatively poor consumer sentiment.

• CARiNG has been slowing down their expansion since 1Q15, with only additional of 2 new shopping complex outlets this quarter. However, we believe that due to failure of achieving breakeven after gestation period (also note that gestation period has increased from 12–18 months to 18-24 months), CARiNG has closed down 1 retail outlet and 1 shopping complex outlet. To date, the group has 102 pharmacies.

• As stated in our previous report, CARiNG will be focusing on primary cities that are less saturated to avoid trespassing competitors’ territories which would hurt their sales.

• In order to maintain and improve thei r market share and sales, CARiNG stated that they will relook at their marketing strategies moving forward. 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

• Taking into account the lower expenses, we t rim our operating expenses slightly by 2%-3%. Due to this, our earnings increase slightly by 3%-5% for FY15-FY17.

Rating

SELL , TP: RM0.93

Positives

• Established and trusted pharmacy chain with reliable 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 for new outlets; overaggressive expansion; intense competition impact selling prices; shares are tightly held resulting in relatively low trading volumes.

Valuation

• Maintain SELL with higher fair value of RM0.93 (from RM0.87 previously), derived based on multiple of 17.6x CY16 EPS, 2x discount to the average of other domestic market-oriented retail pharmacy chain operators in the region.

Source: Hong Leong Investment Bank Research - 29 Apr 2015