INVESTMENT MERIT

· Brief background. Products and services available at 'CARiNG' community pharmacies include the followings:- pharmaceutical products, including health supplements, scheduled drugs and OTC drugs, personalcare products, medical and healthcare devices, and other products and services such as health food, confectionery, beverages, household products and blood-glucose tests, blood pressure test as well as free consultation and advice. It also undertakes retail sales of third parties brand of products at its 'CARiNG' community pharmacies. In addition to third party brands, Caring pharmacies also carry some 'CARiNG' brand of products (<1% of revenue), including bottled mineral water, baby wipes and personal-care products such as beauty accessories, hand and body

wash.

· Crux of revenue derived from operations of community pharmacies. Pharmaceutical products accounted for 60.12% of total revenue, representing the largest group of products sold at 'CARiNG' community pharmacies. Within pharmaceutical products, scheduled drugs accounted for 29.15% of total revenue for the FYE 31 May 2014. This was followed by health supplements and OTC drugs, which accounted for 25.65% and 5.32% of total revenue for the FYE 31 May 2014, respectively. Personalcare

products and medical and healthcare devices accounted for 24.45% and 5.50% of total revenue for FYE 31 May 2014. The remaining 9.93% of our total revenue was contributed by other products and services, including mainly health food, confectionery, beverages, household products and blood-glucose tests. 

· Asset light business model. Caring business model is not capital intensive and involves minimal start-up capex. We expect capex per annum to be minimal considering the relatively low investment of RM0.7m required to start up (including fixtures and working capital) a new community pharmacy. The products carried by Caring’s community pharmacies are mainly third party brands. However, Caring also offers a range of products under the ‘CARiNG’ brand, such as bottled mineral water and personal-care toiletries. Typically, the initial contribution of a new outlet in the first year of operation is not significant but payback period

is estimated at between 16-24 months.

· 9M15 results. Caring registered a revenue of RM93.9m (+15% YoY;+QoQ) and profit before tax of RM10.8m (+19% YoY). This brings 9M15 revenue and PATAMI to RM271.3m (+8.6% YoY) and RM10.2m (-26% YoY), respectively. The higher revenue was underpinned by 7 new outlets, which opened in 9M15, coupled with the revenue growth for existing outlets. In 3Q15, Caring has established additional two new shopping complex outlets and closed down 1 specialised retail outlet and 1 shopping complex outlet. As at 3Q15 there is a total of 102 community pharmacies.

· Expansion plans to drive growth going forward. Moving ahead, the group plans to establish additional 8-10 new community pharmacies in Malaysia per annum. Going forward, the focus is to set up outlets in urban centres, as management believes there are still growth prospects in such areas. The location of new community pharmacy outlet is a vital factor in determining whether the new community pharmacy outlet is to be a whollyowned or partially-owned community pharmacy as CARiNG will normally hold 100% for strategic/prime locations. However, in view of the group’s expansion plan, we expect its operating expenses to remain high over the

medium term. Location wise, instead of expanding in the more competitive Klang Valley area, Caring will also expand into primary cities such as Ipoh, Melaka, Penang and Seremban.

· Change in landscaping soon? According to media reports, the Health Ministry may soon prohibit doctors from dispensing drugs to their patients and diminish their roles to only prescribing. It was also reported that organisations representing doctors and pharmacists agreed, in principle, that dispensing be left to the pharmacists. If this materializes, pharmacy operators, such as Caring, will be the winners of the new system as their sales should increase considerably.

· Valuation appears fair. Our fair value is RM1.20 based on 16x CY16 EPS of 7.5 sen, inline with the closest listed peers’ average. The stock is trading at 18.3x FY15E and 16.2x FY16E EPS. Note that its closest listed peers, including YSP Southeast Asia, CCM Duopharma Biotech and Pharmaniaga are trading at between 13x-19x PERs.

 

Source: Kenanga Research - 14 Jul 2015