Results

• Below expectations - 9MFY16 revenue of RM294.2m (+9% yoy) was translated into core net profit of RM4.5m (-56% yoy).The group’s earni ngs accounted for 39% and 37% of HLIB and consensus full year estimation, respectively.

Deviations

• Caused by (1) lower selling price due to high competition; and (2) lower advertising and promotional income.

Dividends

• None. Usually declared in the fourth quarter.

Highlights

• Thanks to its promotional campaigns that were launched in the previous quarter, CARiNG managed to record a 9% yoy increase in sales. The increment is also attributed by the additional revenue generated from its newly opened outlets in FY2016.

• However, PATAMI plunged 56% yoy from RM10.2m to RM4.5m. We believe earnings were heavily affected by CARiNG’s overaggressi ve expansion appetite where it opened some of its outlets in competitors’ territory.

• CARiNG closed down 1 shopping complex outlet and opened 1 high street outlet and a shopping complex outlet. As of today, the group has 107 community pharmacies.

• In the future, due to higher competition, we believe the group would be affected by its lower selling prices which will ultimately affect its margins.

• In view of CARiNG’s expansion plans, we expect more downside risk from the high start-up costs and high operating expenses.

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

• CEASE COVERAGE
• We cease coverage on the stock due to its continuous set of disappointing results and lacklustre earnings prospects.

Valuation

• TP is maintained at RM1.16 based on P/E multiple of 20.9x CY17 EPS, the average of other domestic market-oriented retail pharmacy chain operators in the region. We believe the valuation is justified gi ven CA RiNG’s lower market capitalisation and weak business outlook.

Source: Hong Leong Investment Bank Research - 28 Apr 2016