Buying 25.35% equity interest in CARING for RM143.5m cash or RM2.60/share. In an announcement to Bursa Malaysia, wholly-owned, Convenience Shopping (Sabah) SB (CSSSB), has entered into a share sale agreement with Motivasi Optima SB for a proposal to acquire for RM143.5m cash, a 25.35% stake in Caring Pharmacy Group Bhd at RM2.60/share. Currently, CSSSB, Tan Sri Dato’ Seri Vincent Tan Chee Yioun (TSVT), Jitumaju SB and U Telemedia SB collectively hold in total 13.22% of CARING shares which will increase to c.38.57% post- acquisition by CSSB. As parties acting in concert, they will be obliged to extend a conditional mandatory general offer (MGO) at a cash offer price of RM2.60/share. The proposed acquisition will be funded via a combination of bank borrowings and internal funds, the proportion of which will be determined at a later date. We view this latest corporate development by SEM mildly positively as although its immediate impact is earnings neutral, there is longer term value to be reaped in terms of realisable scale economies benefit in logistics, inventory management and procurement support. The proposals are expected to be completed in the 1HCY20.

Acquisition PER at 27.3x is close to regional peers’ average PER. Based on CARING’s FY19A (FYE 31st May 2019) PATAMI of RM20.7m, the proposed acquisition works out to 27.3x PER which is close to regional peers’ average PER of 27x. In terms of P/BV, the acquisition works out to 3.7x on FY19A PBV compared to its 5-year historical average of 3.9x.

Impact to financials. SEM will fork out RM143.5m which we expect to be financed by borrowings, increasing its net debt and net gearing from RM51.2m and 0.1x as at 31st Oct 2019 to RM194.7m and 0.2x, respectively. For illustrative purposes, assuming 100% acquisition of CARING via borrowings, SEM have to fork out another RM347.7m (for 61.43%), with combined total 86.78% stake valued at RM491.2m, we expect its net gearing to increase from RM51.2m and 0.1x to RM542.4m and 0.6x, respectively. Hence, our FY20E EPS will be enhanced by 1%. However, we keep our FY20E CNP unchanged as well as our TP until completion of the proposed acquisition.

Strategic synergies for SEM. in terms of (i) Immediate expansion of network and reach of stores and product range through 129 Caring Pharmacies (as at 31st August 2019) strategically located at shopping malls, (ii) immediate access to a fully operational and profitable pharmacy business, (iii) opportunities to cross-sell products from both group of companies, (iv) leveraging on Caring’s current e-commerce network and infrastructure (CARiNG e-Store) and (v) expected economies of scale and synergies from the operational optimisations, with both groups given similarities in the operations, being mass-market retailers (warehousing, distribution and procurement functions).

Maintain MARKET PERFORM with a TP of RM1.35 based on 27x FY20E EPS (which is in line with regional peers’ average PER). Key risks to our call include: lower–than-expected sales, and higher-than- expected operating expenses.

Source: Kenanga Research - 29 Nov 2019