Caring’s  1QFY15  core  earnings  missed  estimates  for  the  second consecutive quarter as margins fell to their lowest level since its listing. We  downgrade  to  SELL  (from  Neutral)  and  trim  TP  to  MYR1.27  (from MYR1.70),  a  17.5%  downside,  pegged  to  16x  FY15F  P/E  as  we  cut  our FY15F/FY16F  earnings  further  by  13.5%/17.4%  respectively.  This  is  in view of the increasingly challenging operating environment. 
 
Second  disappointing  quarter  in  a  row.  Caring  Pharmacy’s  (Caring) 1QFY15 (May) earnings came in below our previous and consensus full-year  forecasts  at  4.2%  and  3.4%  respectively.  Revenue  and  net  profit were  down  by  0.3%  and  43.4%  QoQ  respectively  on  stiff  price competition,  higher  personnel  costs,  lower  advertising  and  promotion income,  and  low  contributions  from  new  outlets.  YoY  topline  improved 6.1%  due  to  the  rise  in  outlet  numbers  but  net  profit  fell  85.7%  on  the aforementioned factors. EBITDA margin also eroded to its lowest point at 2.1%  (1QFY14:  9.6%)  since  its  listing  in  Oct  2013.  This is Caring’s second  consecutive  earnings  disappointment  following  its  4QFY14 earnings announcement in July.

FY15 outlook. We think Caring’s operating environment will continue to be  challenging  in  FY15,  with  intense  pricing competition  and  increasing operational costs casting a pall over its outlook. However, management believes  2HFY15  will  be  a  stronger  period,  as  it  expects  positive contributions from new outlets opened in FY14 to start flowing in.

Risks.  These  include  increasing  price  competition,  new  outlet underperformance, increasing operating costs (especially personnel and marketing) and the scarcity of good locations for new outlets.

Forecasts.  We  lower  our  FY15/16  earnings  forecasts  by  13.5/17.4% respectively  in  view  of  the  continuously  challenging  operating environment (see Figure 2 for earnings assumptions).  

Downgrade  to  SELL  (from  Neutral).  Subsequent  to  our  earnings revision, we downgrade our call to SELL. Our new TP of MYR1.27 (from MYR1.70)  is  pegged  to  16x  FY15F  P/E.  Our  new  P/E  reflects  our  view on the stock’s growth for the next two years that factors in a challenging operating environment and higher earnings risk. Caring is also at a 15% discount to its average 3-year forward P/E.

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Financial Exhibits

SWOT Analysis

Company Profile

Caring Pharmacy (Caring) is a leading community pharmacy chain operator. It operates Malaysia’s third-largest chain of pharmacies by number of outlets and has a dominant presence in the Klang Valley.

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Source: RHB