Caring Pharmacy Group Bhd
(Jan 8, RM1.19)
Upgrade to neutral from sell with a target price of RM1.27: We view Caring Pharmacy Group’s commitment to 10 new outlets in 2015 and increasing retail presence vis-à-vis its peers as positive for the long run. We upgrade our call to “neutral” from “sell” with an unchanged RM1.27 target price or 6.7% upside pegged to 16 times 2015 price-earnings ratio (PER). However, we reiterate our cautious stance on the near-term outlook for this stock due to intense competition and cost pressures.

Management recently said it is committed to opening about 10 new outlets in 2015. These outlets are to be located in around the Klang Valley, in line with its new expansion strategy. Caring currently has a strong foothold in urban middle class areas. The group plans to operate a total of 115 to 120 outlets by 2016.

Our recent observation on Caring’s major competitors — Cosway Sdn Bhd and Guardian Health & Beauty Sdn Bhd — has shown a reduction in outlet numbers in major states such as Kuala Lumpur and Selangor. We believe this is due to the competition from independent pharmacies and the high costs incurred in maintaining pharmacists at these outlets. Caring has now surpassed Guardian with 102 outlets compared with 99 respectively. Meanwhile, Cosway remains in the lead with 138 outlets.

We expect Caring to experience minimal impact from the implementation of the goods and services tax (GST). This is due to healthcare demand being inelastic. Hence, we expect the group’s sales to remain steady post GST. We remain cautious on increasing price competition, underperformance of new outlets, rising pperating costs — personnel and marketing, and scarcity of good new locations. We make no changes to our forecasts at this juncture. We believe the recent selldown of its shares has priced in the two consecutive quarterly earnings disappointments and the weakness in the financial market. We view the group’s increasing presence in the retail pharmacy market via its peers as positive in the long run. — RHB Research Institute Sdn Bhd, Jan 8.

This article first appeared in The Edge Financial Daily, on January 9, 2015.