Caring Pharmacy Group (Caring), slated to be listed on the Main market on 13th Nov 2013, is expected to attract keen market interest being the only listed community pharmacy operator with a network of >85 outlets throughout Malaysia. We expect Caring to register net profit of RM23.8m and RM27.4m in FY14 and FY15, respectively. We conservatively forecast a 17% revenue growth each in FY14 and FY15, which is conservatively lower than the past three years average of 20% on the back of same-store-sales growth and opening of new outlets.

Lion’s share of community pharmacy outlets in Malaysia. Caring is primarily an operator of a chain of community pharmacies under the brand ‘CARiNG’ in Malaysia. Based on the number of community pharmacy outlets, Caring is ranked among the top three community pharmacy operators in Malaysia as at June 2013. Indicative fair value of RM1.55 based on 13x CY14 EPS of 11.9 sen.

Asset light and cash rich business model. We consider Caring’s business model to be asset light. This is simply because the community pharmacy business model is relatively capital light and involves only minimal capex to open shop. We expect capex p.a to be minimal considering that it only requires an average of RM0.7m to start up (including fixtures and working capital) a new community pharmacy. Based on our forecast, Caring’s strong average cashflow from operations of RM28m p.a. over the next two years support management guidance of a dividend payout ratio of not less than 30%.

Business model under the joint venture agreement dynamics explained. An integral part to Caring’s business model is its joint venture scheme. Generally, the scheme enables pharmacists who are branch managers with at least a year of working experience with 'CARiNG' community pharmacy to participate as business partners in operating community pharmacies under the brand of 'CARiNG'. Under the scheme, Caring typically maintain a shareholding of 50% or more and management control over the operations.

Expansion plans to drive growth going forward. Moving ahead, the group plans to establish additional 30-35 new community pharmacies in Malaysia between FY14 and FY16. It also intends to renovate its new head office and warehouse to cater to the group’s expanding operations. Typically, the initial contribution of a new outlet in the first year of operation is not significant but payback period is <12 months.

Our fair value is RM1.55 based on 13x CY14 EPS of 11.9 sen. We expect Caring to register net profit of RM23.8m and RM27.4m in FY14 and FY15, respectively. We conservatively forecast a 17% revenue growth each in FY14 and FY15, which is conservatively lower than the past three years average of 20% on the back of same-store-sales growth and opening of new outlets. We have factored in marginally lower margins taking into account higher advertising and promotion activities in an effort to increase or sustain its market share in our forecasts. Based on our earnings estimate and a 30% dividend payout assumption, we expect FY14 and FY15 net DPS of 3.3 sen and 3.8 sen respectively, translating to an average yield of 3%. 

Source: Kenanga