Caring Pharmacy’s (Caring) FY14 results fell short of
our and consensus estimates. Net profit declined 79.4% q-o-q
due to a sharp increase in operating cost and losses from new outlets
. We downgrade the stock to NEUTRAL (from Buy), with a lower
FV of MYR1.95, after cutting our FY15 earnings estimate by
24.0% to incorporate lower revenue from new outlets and higher
operating costs.
Coming in short. Caring’s FY14 earnings missed estimates, making up only 70-75% of our and consensus’ forecasts. While the company’s revenue grew 8.1% q-o-q, net profit contracted 79.4% q-o-q, mainly due to: i) lower profit margin from sales and promotions, ii) lower selling prices due to competition, iii) higher operating costs, and iv) losses from new outlets as well as impairment charges from existing outlets. It has declared an interim dividend of 1.5 sen for the quarter under review.
Increasing competition. We gather from management that it recently opened its 99th outlet, including two new outlets in KLIA2. With thesenew stores, Caring looks on track to meet its initial target of 12-15 new outlets for 2014, adding 11 new outlets versus the 88 in total as at Dec2013. The expansion is in line with rising demand for health products, as well as allows the group to compete with its peers.
Forecast changes. We cut our FY15 earnings forecast by 24.0% to MYR21.6m (from MYR28.4m) to factor in the lower revenue contribution and higher start-up costs from new outlets. We also introduce our FY16 forecast for a 19.0% y-o-y earnings growth, bolstered by an expected increase in revenue contribution from Caring’s existing outlets and new outlets opened in 2014-15.
Risks. We believe the key downside risks are: i) a scarcity of certified pharmacists, ii) the extended gestation period for new outlets, and iii) increasing competition from retail pharmacy peers.
Downgrade to NEUTRAL, with lower MYR1.95 FV. Following our earnings revision, we downgrade our call to NEUTRAL, with a lower FV of MYR1.95 (from MYR2.48), still pegged to an unchanged 18x CY15 EPS – at a discount to the larger healthcare stocks that are trading at 20x-30x P/Es. We believe Caring’s margins will remain under pressure in the near term, owing to its ongoing expansion and fierce competition. A stable earnings performance and margin improvement are key re-rating catalysts for the stock.
Sourcel: RHB
Coming in short. Caring’s FY14 earnings missed estimates, making up only 70-75% of our and consensus’ forecasts. While the company’s revenue grew 8.1% q-o-q, net profit contracted 79.4% q-o-q, mainly due to: i) lower profit margin from sales and promotions, ii) lower selling prices due to competition, iii) higher operating costs, and iv) losses from new outlets as well as impairment charges from existing outlets. It has declared an interim dividend of 1.5 sen for the quarter under review.
Increasing competition. We gather from management that it recently opened its 99th outlet, including two new outlets in KLIA2. With thesenew stores, Caring looks on track to meet its initial target of 12-15 new outlets for 2014, adding 11 new outlets versus the 88 in total as at Dec2013. The expansion is in line with rising demand for health products, as well as allows the group to compete with its peers.
Forecast changes. We cut our FY15 earnings forecast by 24.0% to MYR21.6m (from MYR28.4m) to factor in the lower revenue contribution and higher start-up costs from new outlets. We also introduce our FY16 forecast for a 19.0% y-o-y earnings growth, bolstered by an expected increase in revenue contribution from Caring’s existing outlets and new outlets opened in 2014-15.
Risks. We believe the key downside risks are: i) a scarcity of certified pharmacists, ii) the extended gestation period for new outlets, and iii) increasing competition from retail pharmacy peers.
Downgrade to NEUTRAL, with lower MYR1.95 FV. Following our earnings revision, we downgrade our call to NEUTRAL, with a lower FV of MYR1.95 (from MYR2.48), still pegged to an unchanged 18x CY15 EPS – at a discount to the larger healthcare stocks that are trading at 20x-30x P/Es. We believe Caring’s margins will remain under pressure in the near term, owing to its ongoing expansion and fierce competition. A stable earnings performance and margin improvement are key re-rating catalysts for the stock.
Sourcel: RHB
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