Results

• CARiNG achieved 1QFY16 revenue of RM92.6m (+4.7% yoy, -3.0% qoq), which translates into adjusted PATAMI of RM1.0m (+83.9% yoy, -61.2% qoq).

• Both top line and bottom line came in below ours and consensus expectations, with PATAMI registering only 9% and 7% of HLIB and consensus full year forecasts, respectively.

Deviations

• Seasonality. 1QFY15 was only 4% of full year PATAMI.

Dividends

• None. Usually declared in the fourth quarter.

Highlights

• Yoy… CARiNG’s 1QFY16 revenue was higher by 4.7% mainly on the back of higher contribution by 9 new outlets in FY2015 as well as 3 new outlets in 1QFY16. PBT also increased 28% from RM1.1m to RM1.4m. The group has closed down 1 specialised retail centre. Thus, leaving the total specialised retail centre to 5.

• Qoq… PBT fell 62.4% qoq resulting from lower sales (revenue was lower 3% qoq) arising from poor consumer sentiment post GST implementation as well as long gestation period of new outlets which ranges from 24 to 36 months.

• CARiNG currently has 106 outlets vs. 104 outlets in the previous quarter (4QFY15). For CARiNG’s expansion, the group plans to open circa 10 – 12 outlets per annum. We feel there will be more downside risk on its expansion plans due to high competition and start-up costs. Also with inflationary cost pressure as well as weak consumer sentiment, we believe its profit margin will be under pressure with longer gestation period.

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. Also introduced our FY18 forecast.

Rating

SELL , TP (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

• High working capital and start-up costs for new outlets lengthen gestation period; overaggressive expansion; intense competition impact selling prices; shares are tightly held resulting in relatively low trading volumes.

Valuation

• Still maintain SELL with TP of RM0.93 under review pending update from the management. TP is derived based on the latest P/E multiple of 17.6x CY16 EPS, 2x discount to the average of other domestic market-oriented retail pharmacy chain operators in the region. We believe the discount is justified given CARiNG’s lower market capitalisation and weak business outlook.

Source: Hong Leong Investment Bank Research - 29 Oct 2015