1HFY16 (May) earnings reached 22%/23% of our/consensus forecastsrespectively. We consider the earnings inline as 3Q earnings were lumpy due to the timing of rebates from suppliers. Reiterate SELL with a DCF-derived TP of MYR1.35 (29% downside). We expect the toughoperating environment to persist going forward thus the premiumvaluation is unwarranted, in our view.

Contraction after four quarters of growth. After posting strong YoYgrowth over the past four quarters, CARiNG Pharmacy’s (CARiNG)2QFY16 earnings fell 8.4% YoY to MYR1.9m amidst stiff market competition. Earnings surged 88% QoQ, amplified by a low base. During the quarter, it opened a new outlet and closed one to sustain its network of 106 outlets.

At the half-year mark. 1HFY16 earnings grew 11% YoY to MYR2.9m while net margin was stable at 1.5%. Meanwhile, CARiNG’s balance sheet is still in a net cash position albeit declining to 47.8% from 50.6% at end 1QFY16. Gross gearing remained at 9.1%. We view its prudent capital management positively as this is the second consecutive quarterwhere it records a negative net cash from operating activities.

Outlook. We expect 3QFY16 earnings to pick up on the timing of purchase rebates from suppliers. Over the longer term, we expect it to benefit from the Government’s potential restructuring of the medicine dispensary due to its extensive network of outlets. However, this could be partially offset by intense competition from other established players such as Cosway and Guardian as well as standalone pharmacy outlets.

Maintain SELL, revisit at lower levels. We reiterate our SELL on the stock recommendation with a DCF-derived TP of MYR1.35 (WACC: 8.7%, TG: 1.5%). Against our forecast, it trades at a lofty 30x FY16 and FY17 PE. Even after adjusting for its net cash position (26.2sen per share), it trades at rich P/E multiples of 26x over the same period. With limited pricing power, lower earnings quality and low barriers of entry, we see no reason for the stock to trade at similar multiples to the hospital operators (ie 25-50x P/E) which offers wider range of services andcommands stronger pricing power. On the flipside, we believe this makes a good exit opportunity. Revisit the stock at lower levels. Risk to earnings includes: i) better-than-expected sales, and ii) substantial costsavings from outlet rationalisation.