6MFY21 came in below estimates as CVS operation came under pressure from the prolonged lockdown. However, its Pharma operations saw robust growth given the on-going pandemic. TP raised to RM1.60 to account for the robustness and defensive contribution of its Pharma operations. Reiterate MARKET PERFORM. Below expectations. 6MFY21 PATAMI of RM13m came below our/consensus expectations at 23%/22% of estimates primarily due to: (i) crimped contribution from its CVS operations, and (ii) higher ETR than expected. No dividend declared as expected for the quarter as dividend historically is declared in the final quarter.

YoY, as expected 6MFY21 saw the top-line improving, by 5% to RM1.33b due to contribution from its Pharma segment (Caring Pharmacy).Its CVS operations saw revenue falling 22% to RM886m while Pharma operations contributed RM448m to top-line. Pharma segment contributed 34% to top-line. GP margin was still under pressure, shedding 2ppt to 27%. Opex margins were contained shedding 3ppt on wage freeze and lower operational cost. PATAMI improved moderately (+3%) to RM13m on account of higher ETR of 41% (due to certain expenses not deductible under tax legislation).

QoQ, revenue improved slightly by +3% to RM677m, underpinned by strong performance from its Pharma segment (+15% to RM240m) while CVS fell slightly by 3% (to RM437m). GP margin stabilised but higher operating costs saw EBIT margin shedding 2ppt to 10.9%. PATAMI fell 90% to RM1m on account of higher ETR (59% vs 1Q21: 34%) as mentioned above.

No change in our view of sequential improvements - albeit slower than expected given the prevailing lockdowns – premised on a gradual normalisation of retail footfall. However, we believe the group’s CVS business is likely to remain challenging. This is premised on: (i) the intensifying competition within the CVS space following the entrance of new players which are stocked with ample fresh food offerings, as well as (ii) shorter operating hours amid the Covid-19 restrictions, compared to 24 hours previously. Nonetheless, the foresaid demerits are expected to be cushioned by solid contribution from its pharmacy segment, as demand for pharmaceutical products is anticipated to remain bullish in 2021.

Post results, FY21E/FY22E earnings revised by -7%/+7 to RM51m/RM77 on lower contribution from the CVS operations but mitigated by a robust Pharma operations.

MARKET PERFORM. We raised our TP to RM1.60 (from RM1.50) pegged to an unchanged FY22E PER of 24x PER attaching a 0.5SD below its 5-year mean to account for the immediate challenges in its CVS operations coming from a prolonged lockdown and competition from the CVS space. Fully Valued, reiterate MARKET PERFORM.

Key risks to our call include: lower–than-expected sales from its Pharma segment, and higher-than-expected operating expenses

Source: Kenanga Research - 27 Aug 2021