9MFY21 CNP came in below expectations on account of unexpected higher corporate exercise expenses. Nonetheless, the addition of Caring Pharmacy is paying dividends as YoY top line remained resilient driven by the Pharma segment. TP unchanged at RM1.60 – fully valued. We maintain our MARKET PERFORM call.

Below expectation. 9MFY21 CNP of RM26m came in below both/our consensus estimates at 51%/61%, respectively. The wide variance is due to on-going corporate exercise expenses which has stretched by another RM7m to RM18m.No dividend declared as expected as dividends are normally declared in the final quarter.

YoY, top-line remained resilient growing 4% to RM2.01b on account of robust contribution from its Pharma segment. Revenue from the Convenience Store (CVS) segment fell 21% to RM1,290m with most product categories recording lower revenue. Excluding the corporate exercise expenses, the segment ended with a PAT of RM14m (-61%). Pharma segment saw a 132% uptick to RM724m. The acquisition of Phil House and Wellings Group earlier this year contributed RM187m. Group GP margin was still under pressure, shedding 2ppt to 27% while opex was well contained as margins shed 2ppt on wage freeze and lower operational cost on account of shorter operating hours.

QoQ, stronger performance from the PHARMA segment was seen which drove overall top-line up by 0.5ppt to RM680m. The CVS segment was affected by the FMCO affecting footfall and sales productivity. CVS revenue declined 20% to RM405m. Gross profit declined 23% to RM122m. Despite lower opex by 10%, this segment saw LAT of RM1.2m. The Pharma segment saw a 61% uptick in revenue to RM276m in tandem with the continued consumer focus on personal well-being and healthcare. Group CNP ended at RM9m (>100%) after additional corporate exercise expense of RM7m for the quarter.

No change in our view of sequential improvements as more business activities gradually re-open. 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 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 earnings revised by -24% to RM39m on the unexpected corporate exercise expense and FY22E earnings maintained.

MARKET PERFORM. We maintain our TP at RM1.60 pegged to an unchanged FY22E PER of 24x PER attaching a 0.5SD below its 5-year mean to account for the challenges in its CVS operations and Pharma segment as the pandemic recedes. 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 - 26 Nov 2021