Results

• 1HFY16 revenue of RM190.8m (+8% yoy) was translated into core net profit of RM2.9m (+11% yoy).

• Despite top line being broadly in line, bottom line came in below expectations, accounting for 25% and 23% of HLIB and consensus full year estimates, respectively.

Deviations

• Due to higher than expected operating expenses.

Dividends

• None. Usually declared in the fourth quarter.

Highlights

• 1HFY16 YoY review… The group charted higher turnover by 8% thanks to the contribution from the 13 newly opened outlets in FY15 and FY16. Its PBT also increased by 5% yoy from RM4.0m to RM4.2m.

• During the quarter, CARiNG closed down 1 high street outlet and opened 1 more shopping complex outlet . Currently, the group has a total of 106 community pharmacies vs. 103 in 1HFY15.

• 2QFY16 review… PBT fell 3% yoy mainly due to lower selling prices resulting from higher market competition. We believe the following quarter would be better as historically, 3Q has been the strongest quarter for CARiNG (thanks to purchase rebate from suppliers).

• Moving forward, we expect operating expenses to remain high due to its expansion plan. We expect more downside risk on its expansion plans due to high competition and startup costs.

Risks

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

Forecasts

• Unchanged.

Rating

SELL , TP RM1.16

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

• Maintain SELL with TP of RM1.16 based on P/E multiple of 20.9x CY17 EPS, the average of other domestic marketoriented retail pharmacy chain operators in the region. We believe the valuation is justified gi ven CARiNG’s lower market capitalisation and weak business outlook.

Source: Hong Leong Investment Bank Research - 28 Jan 2016