Caring‘s profits squeezed by lower selling price

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Caring Pharmacy Group Bhd
(Jan 28, RM1.19)
Maintain sell with target price of RM1:
Caring Pharmacy Group Bhd’s first half ended Nov 30, 2014 (1HFY15) revenue of RM177.4 million (+5.8%  year-on-year (y-o-y) was translated into core net profit of RM2.6million (-63.4% yoy). Despite top line being broadly in line, bottom line came in way below expectations, accounting for 16.2% and 15.7% of HLIB Research and consensus full-year estimates, respectively, due to lower-than-expected profit margins due to lower selling prices from market competition despite higher volume.

Despite a satisfactory 1HFY15 revenue of RM177.4m (+5.8% y-o-y), profit after tax and minority interest was squeezed to RM2.7 million (-62.8% y-o-y), which was mainly due to lower economies of scale arising from lower selling prices in order to attract market share, despite higher volume. It is noticeable that Caring has been slowing down its expansion plan from first quarter 2015 onwards, with only two shopping complex outlets this quarter. 

The company is now exercising more careful discretion in outlet location to avoid trespassing competitors’ territories which would cause damage to its sales. This explains the slowdown in outlet expansion observed. Another note is the closing down of one outlet in this quarter, which is most likely due to failure to achieve breakeven after gestation period. To date, Caring has a total of 102 outlets. Caring shared that it will relook its marketing strategies to improve sales in order to maintain market share. It remains confident that the company will continue to be profitable in the coming quarter.

The risks are the over-aggressive expansion has resulted in margin compression which may continue to drag earnings growth, keen competition from other pharmacy chains such as Guardian and Watsons, and slowdown in consumer discretionary spending.

The positives — 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; the only pure retail pharmacy chain listed locally. 

The negatives — higher working capital and start-up costs for new outlets; over-aggressive expansion; intense competition impact selling prices; shares are tightly held resulting in relatively low trading volumes.

We maintain sell with a lower fair value, reflecting our earnings per share (EPS) revision. This is derived based on unchanged multiple of 15.5 times estimated FY16 EPS, two times discount to the average of other domestic market oriented retail pharmacy chain operators in the region. — HLIB Research, Jan 28

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This article first appeared in The Edge Financial Daily, on January 29, 2015.