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Caring Pharmacy Group Bhd
(Oct 15, RM1.62)
Maintain “neutral” with a lower target price (TP) of RM1.70:
Our recent meeting with the management shed some light on Caring’s outlook. The management said it was reviewing its expansion strategy in light of the recent financial year 2014 (FY14) earnings disappointment.

Caring admitted to being too aggressive with its expansion plan post initial public offering (IPO) and, therefore, is expected to be more selective in opening its future new outlets, taking into account important criteria such as: i) a good customer flow, ii) an affluent and educated population catchment; and iii) matured townships with a considerable aged community. Caring’s disappointing FY14 earnings were mainly attributed to underperforming new outlets, which led to an increase in operating costs on a rise in marketing and promotional activities undertaken to boost customer flow.

While we expect FY15 revenue to continue growing by 12.7% on increasing contributions from existing and stable new outlets, we expect first half of FY15 (1HFY15) to be a rather muted period for Caring as it gradually tries to get back on track and take control of its spiralling operating costs. We believe full-year margins will be squeezed on the back of intensifying competition from independent retail pharmacies and its continuing expansion plans. However, we expect conditions to improve in 2HFY15 onwards on the aforementioned positives.

Key risks include: i) the scarcity of good locations, ii) the lagging business processes, iii) the increasing number of independent retail pharmacies and iv) the longer-than-expected gestation period for new outlets.

We slash our FY15 and FY16 earnings forecasts by 11% and 15% respectively in view of Caring’s increasingly challenging operating environment. Stay “neutral”. After revising our earnings forecasts, our new TP of RM1.70 versus RM1.95 is pegged to 18 times calender year 2015 forecast (CY15F) price-to-earnings (PER). Our target PER is a discount to bigger healthcare stocks like KPJ Healthcare Bhd at 26 times FY15F PER. As we expect Caring’s earnings growth to be capped by its expansion plans and operating cost pressures, we maintain our “neural” call. — RHB Research, Oct 15

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This article first appeared in The Edge Financial Daily, on October 16, 2014.

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