Caring’s 9MFY15 PBT posts double-digit decline

by **Cals** Tue 05 May 2015, 01:29

Caring’s 9MFY15 PBT posts double-digit decline

Caring Pharmacy Group Bhd ([You must be registered and logged in to see this image.] Financial Dashboard)
(April 29, RM1.19)
Maintain sell with a fair value of 93 sen: Caring Pharmacy’s revenue of RM271.3 million (+8.6% year-on-year [y-o-y]) for the first nine months of financial year 2015 ended February (9MFY15) translated into a core net profit of RM10.2 million (-26% y-o-y).
Despite its top line being broadly in line, its bottom line came in way above our expectations, but in line with consensus, coming in at 94% and 78.4% of Hong Leong Investment Bank Research and consensus full-year estimates respectively.
Caring’s third quarter (3Q) FY15 profit before tax (PBT) of RM10.8 million achieved significant growth of 267% quarter-on-quarter, mainly contributed by the materialisation of purchase rebate from their suppliers.
Despite the absence of one-off listing expenses, its 9MFY15 PBT posted a double-digit decline, 26% y-o-y, due to its over-aggressive expansion strategy coupled with relatively poor consumer sentiment.
Caring has been slowing down its expansion since 1QFY15, with the addition of only two new shopping complex outlets this quarter. However, we believe that due to the failure to achieve break-even after gestation period (also note that gestation period has increased from 12 to 18 months to 18 to 24 months), Caring has closed down a retail outlet and one shopping complex outlet. To date, the group has 102 pharmacies.
As stated in our previous report, Caring will focus on primary cities that are less saturated to avoid trespassing on competitors’ territories which would hurt its sales. In order to maintain and improve its market share and sales, Caring stated that it will relook its marketing strategies moving forward. It remains confident that the company will continue to be profitable in the coming quarter.
Risks to our call are over-aggressive expansion which has resulted in margin compression which may continue to drag earnings growth, keen competition from other pharmacy chains such as Guardian and Watsons, and a slowdown in consumer discretionary spending.
Taking into account the lower expenses, we trim our operating expenses slightly by 2% to 3%. Due to this, our earnings increase will be slight, by 3% to 5% for FY15 to FY17.
Positives to our call are the established and trusted pharmacy chain with reliable service and competitive product pricing, full-time registered pharmacists available throughout retail operating hours, benefits from economies of scale and shared services, and the only pure retail pharmacy chain listed locally.
Negatives are higher working capital and start-up costs for new outlets, over-aggressive expansion, intense competition impacting selling prices, and the shares are tightly held resulting in relatively low trading volumes.
We maintain our “sell” call with higher fair value of 93 sen (from 87 sen previously), derived based on a multiple of 17.6 times calendar year ending March 2016 earnings per share, a two times discount to the averages of other domestic market-oriented retail pharmacy chain operators in the region. — HLIB Research, April 29
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This article first appeared in The Edge Financial Daily, on April 30, 2015.