10 things I learned from the 2019 Caring Pharmacy AGM

Listed on Bursa Malaysia in November 2013, Caring Pharmacy Group operates a chain of community pharmacies under the CARiNG brand in Malaysia. The company retails pharmaceutical, healthcare, and personal care products. It is also involved in the central warehousing and distribution of pharmaceutical, healthcare, and personal care products; and Internet and warehouse sale of healthcare and personal care products. The company was founded in 1994 and is headquartered in Petaling Jaya, Malaysia.

The company has experienced robust growth in recent years, and I attended the AGM to learn more about the company. Here are 10 things I learned from the 2019 Caring Pharmacy AGM:

1. Revenue grew 17.9% y-o-y to RM599.2 million in the financial year ended 31 May 2019 (FY2019). Likewise, net profit grew 10.0% y-o-y to RM25.6 million. This was mainly driven by better same-store sales growth of matured outlets of more than two years old, and the 14 new outlets opened during the year. A portion of revenue growth (5.6 percentage points) was also attributable to the change of accounting standards to MFRS15. Over the past five years, revenue has grown at a compound annual growth rate (CAGR) of 13.3% from RM364.1 million in FY2015 to RM 599.2 million in FY2019.

2. Caring opened 14 new outlets in FY2019, comprising eight complex outlets and six high street outlets, reaching a total of 125 community pharmacies as of 31 May 2019. The pace of outlet openings has been gradual, which has increased from 104 outlets in FY2015. The reason is that management adopts a prudent expansion strategy to only open outlets in areas which it believes are strategic.

3. The Minority Shareholder Watchdog Group (MSWG) asked about the ratio between profitable and loss-making outlets. The management replied that among the 125 pharmacies, 96 are matured outlets while the remaining 29 are immature outlets. Caring considers outlets as matured after a gestation period of three years. Among the mature outlets, 82 are profitable while the rest are still loss-making. Among the immature outlets, 12 are profitable while the remaining 19 are loss-making. Among outlets maturing in the next financial year, only one made a loss in FY2019. The remaining immature loss-making outlets have only been in operation for less than two years. In his reply to a shareholder’s question, group managing director Chong Yeow Siang reveals that in certain cases, loss-making outlets may be kept running for strategic purposes. For example, loss-making outlets in established commercial areas can serve as a way to market the brand.

4. Caring has embarked on a five-year transformation plan to achieve 200 outlets and RM1 billion in revenue by 2024. The MSWG inquired about the amount of capital expenditure required to open the 75 new outlets and the locations in which the stores will be opened. The management replied that the opening of the outlets would be achieved through a combination of stores opened directly by Caring or added via merger and acquisition. They added that the new outlets may be wholly or partially owned and estimated capital expenditure of RM45 million to open the additional 75 outlets. Caring plans to expand in the major cities and secondary towns with a high population but where it has little or no presence currently. Chong acknowledged that expanding in secondary towns will be challenging as the demographics are generally different compared to in cities (e.g. lower spending power) resulting in a need to tweak the business model in those areas to better suit the local needs.

5. A shareholder enquired about the percentage of revenue contribution and profit margins of Caring’s exclusive and home-branded products. Chong revealed that the products contributed 13-14% of group revenue and generated gross margins of about 25%. Caring’s exclusive and home-branded products achieved strong growth in FY2019, with like-for-like sales growth of 50.1% y-o-y. Home-branded products, with its higher margins, also help cushion margin pressures driven by stiff competition in the local pharmacy industry.

6. The shareholder also wanted to know the amount of inventory write-down as it is not reported in the financial statements. Chong stated that about 90% of merchandise may be returned to suppliers if they become expired or are slow-moving, resulting in minimal inventory write-down. However, he acknowledged that home-branded products have to be managed more wisely as the losses will be borne directly by the company.

7. Another shareholder wanted to know more about Caring’s e-commerce/digital strategy. Chong said that although sales from Caring’s e-store is still insignificant at about 1% of group revenue, it is experiencing encouraging growth. The launch of Click & Pick – which allows customers to purchase products online and collect their order at selected outlets – in FY2018 has received positive response from customers. Meanwhile, Caring’s loyalty programme via its mobile app has recruited a total of 389,455 members so far.

8. A shareholder wanted to know who Caring’s biggest competitors are. Chong views all pharmacies as Caring’s competitors with established pharmacy operators such as Watsons and Guardian as the most direct competition. At the lower end, the emergence of aggressive deep-discounting pharmacy formats in recent years have given the company a run for their money. Nevertheless, Chong views competition as a driving force for the company to improve and innovate.

9. The same shareholder also wanted to know if it is legally required to have a registered pharmacist in every pharmacy outlet. Chong answered that it isn’t a legal requirement but rather a matter of the business model of the pharmacy operator. In the case of Caring, which has a stronger emphasis on medicines, supplements, and over-the-counter medications, pharmacists play an important role in improving the revenue of an outlet. Therefore, Caring has pledged to always staff its outlets with a pharmacist during business hours, who acts as a source of expert knowledge for customers.

10. Another shareholder inquired about Caring’s level of exposure to foreign exchange risk. Chong said that most of the company’s overseas suppliers have distributors locally, so minimal forex risk is incurred. However, he acknowledged that with Caring’s ambition to grow its exclusive and home-branded products, forex risk may increase in the future as the company may deal directly with overseas suppliers to produce these products.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Young Jia Yi

Jia Yi has been an investor since the age of 18, following the investing philosophies of Buffett and Munger. He currently works as an industry analyst in an independent investment research firm. He is passionate about understanding how things are interconnected in the world and enjoys reading in his free time.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button