Results

• CARiNG’s FY15 revenue of RM366.7m (+8.4% yoy) was translated into core net profit of RM12.9m (-15% yoy).

• Despite top line being broadly in line, bottom line came in above both ours and consensus expectations, or at 115% and 107% of HLIB and consensus full year estimates, respectively.

Deviations

• Lower than expected operating expenses

Dividends

• Declared a final dividend of 2 sen/share (payout ratio of 34%), 0.5 sen/share higher than our estimated DPS.

Highlights

• FY15 review… CARiNG’s achieved higher revenue in FY15. It increased 8% yoy from RM338.3m to RM366.7m. The increase in sales was cont ributed by its new outlets which opened in FY15. Compared to FY14, its PBT of RM18.5m on the other hand, declined 19% yoy. This is due to lower selling prices as a result of market competition.

• 4QFY15 review… Despite registering a marginally higher revenue of RM95.4m (+2% yoy) in 4QFY15, PBT took a plunge to RM3.6m (-67% qoq). This is mainly due to: (1) Signi ficant purchase rebates recei ved from CA RiNG’s suppliers in 3QFY15; (2) Lower selling prices resulting from higher competition; (3) Higher operating expenses; and (4) Losses from some of its outlets.

• As at 31st May 2015, CARiNG has 104 outlets in total, compared to 99 outlets on 31st May 2014. The group plans to have 120 outlets by end of 2016. We feel there will be more downside risk on its expansion plans where profit margin will be compressed further due to initial start-up costs and keen competition.

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

• Unchanged, pending an update from the management.

Rating

SELL , TP: RM0.93 (Under Review)

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 fai r value of RM0. 93 (under review) 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 Jul 2015