We view Caring’s commitment to 10 new outlets in 2015 and increasing retail  presence  vis-à-vis  its  peers  as  positive  for  the  long  run.  We upgrade  our call  to NEUTRAL (from Sell) with an unchanged MYR1.27 TP  (6.7%  upside) pegged  to  16x  2015F  P/E.  However, we  reiterate our cautious stance  on the near-term outlook for  this stock  due to intense competition and cost pressures. 

A quick update. Management recently said it was committed to opening about 10 new outlets in 2015. These outlets are to be located in strategic and densely populated urban areas around the  Klang Valley, in line with its  new  expansion  strategy.  Caring  Pharmacy  (Caring)  currently  has  a strong  foothold  in  urban  middle  class  areas  like  Damansara,  and Bangsar. The group plans to operate a total of 115-120 outlets by 2016. 

Industry  development.  Our  recent  observation  on  Caring’s  major competitors  –  Cosway  (M) SB (Cosway)  and Guardian  Health & Beauty SB (Guardian) – has shown a reduction in outlet numbers in major states like  Kuala  Lumpur  and  Selangor.  We  believe  this  is  due  to  the competition from independent pharmacies and the  high costs  incurred  in maintaining  pharmacists  at  these  outlets.  Caring  has  now  surpassed Guardian  with  102  outlets  vs  99  respectively.  Meanwhile,  Cosway remains in the lead with 138 outlets.

Goods  and  services  tax  (GST)  is  a  minimal  concern.  We  expect Caring  to  experience  minimal  impact  from  the  implementation  of  the GST. This is due to the  healthcare  demand  being inelastic.  Hence,  we expect the group’s sales to remain steady post GST.

Risks.  We  remain  cautious  on:  i)  increasing  price  competition,  ii) underperformance of new outlets, iii)  rising  operating costs  –  personnel and marketing, and iv) scarcity of good new locations.

Forecasts.  We make no changes to our forecasts at this juncture.

Upgrade  to  NEUTRAL.  We  upgrade  Caring  to  NEUTRAL  (from  Sell)with an unchanged  MYR1.27 TP pegged to  16x 2015F  P/E.  We believe the  recent  selldown  of  its  shares  has  priced  in  the  two  consecutive quarterly  earnings  disappointments  and  the  weakness  in  the  financialmarket. We view  the group’s increasing  presence in the  retail pharmacymarket  vis-à-vis  its  peers  as  positive,  in  the  long  run.  However,  the operating environment remains challenging in the near term.

Source: RHB