The Caring approach, with 12 to 15 new pharmacies

by **Cals** Wed 22 Jan 2014, 19:12

Business & Markets 2014

Written by RHB Research

Wednesday, 22 January 2014 10:17

Caring Pharmacy Group Bhd
(Jan 21, RM2.15)
Maintain buy with a target price of RM2.38: Caring’s management disclosed at our recent corporate luncheon that it plans to open 12 to 15 new pharmacies annually. It also hinted that it will pay dividends above the 30% minimum stipulated during its initial public offering.

Caring was represented by managing director and executive director Chong Yeow Siang. The event was attended by 14 fund managers. The company, which is confident on its store expansion plans and industry outlook, provided insights on its competitive strategy, staff attraction and retention plans, cost structure and other main concerns.

The notable takeaways from the event are: (i) its target to be a serious player in the retail healthcare segment rather than moving into consumer lifestyle products; (ii) plans to open 12 to 15 new outlets per year — higher than our initial assumption of 11 annually; (iii) focus on Klang Valley suburbs to cement its already dominant market share; and (iv) a higher dividend payout than what was set earlier is under consideration.

Following the insights gleaned from the luncheon we raise our financial year 2014 (FY14) profit forecast by 3%, FY15 by 4.4% and FY16 by 5.5%.

This lifts our fair value to RM2.38 (from RM2.28) based on an unchanged 18 times current year 2014 forecast price earnings ratio. This represents a discount to the larger cap healthcare stocks and is comparable to the mid cap consumer plays.

We now expect a 40% dividend payout ratio instead of 30% which will equate to decent 2% to 2.4% net yields for FY14 forecast (FY14F) and FY15F.

We like Caring’s defensive earnings with dividends to boot, its hands-on management and market leadership. We think the company still has the ability to surprise on the upside with a better store mix, margins improvement and cost efficiency.

Its valuations are justified by the scarcity of pure pharmacy plays locally and regionally, its resilient store sales, stable return on equity of 24% and a strong three-year earnings compound annual growth rate of 20.3%. — RHB Research, Jan 21

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This article first appeared in The Edge Financial Daily, on January 22, 2014.