Retail

The Company

City Pharmacy Limited (CPL) Group is a leading retailer in PNG and has a combined retail operation of 64 stores nationwide. It employs 3700 people, of which 97% are Papua New Guinean citizens. CPL’s retail network spans health and beauty chains, supermarkets, hardware stores, coffee shops, a multiplex cinema, a clothing company and duty-free shops.

Established in 1986, CPL started as the City Pharmacy chain, offering health care products to population centres across the country.

Sales revenue increased from PGK401.11m ($136.9m) to PGK462.08m ($157.7m) in FY 2015. Meanwhile, net profit after tax was PGK7.35m ($2.5m), slightly below the FY 2014 result. Group net assets grew from PGK113.25m ($38.7m) to PGK116.13m ($39.6m).

Revenue growth was impacted by a fire at the company’s flagship shop at Waigani Central. However, the old Waigani shop was reopened temporarily in the third quarter of 2016, which helped to sustain sales at annual average rates.

The company has taken provisions for insurance claims as a result of the fire. The insurance company has yet to confirm the amounts payable. We anticipate the Waigani Central shop to be reopened for business at the end of 2016.

The management commenced a strategic review in FY 2014 to enhance customer experience in terms of price and quality. The progress so far has been positive, though there have been several setbacks. The company continues to invest in its people and also increasing its branch footprint across the country. CPL remains committed to health care in PNG, with its 32nd branch opened in Mount Hagen in March 2016. Several outlets were successfully opened, and CPL entered fashion retailing, with the opening of the first “Jacks of PNG” shop in the first half of 2015, followed by a second outlet in the fourth quarter. Duty-free shops at the airport were also opened in 2015.

In July 2015 CPL acquired the 50% stake in Hardware Haus owned by Vinod Patel, making Hardware Haus a 100% subsidiary of the CPL group. The group also sold the Kwik Built division of Hardware Haus in the fourth quarter of 2015, consolidating the Hardware Haus business and resulting in the net assets increasing 2.65% during the year.

General business slowdown in the economy, foreign exchange issues impacting imports and political uncertainty could hinder progress. That said, the business is committed to its strategy of introducing new brands and setting up new shops to increase customer offering and ultimately improving shareholder value over time. New openings could improve revenue in 2016.

Outlook

CPL’s commitment to improving customer experience in PNG has seen its debt-to-equity ratio increase to accelerate the expansion within the National Capital District. This should translate into increased sales going forward. The company opened two new Stop & Shop outlets at Koki and Harbour City in July 2016, with more focus in driving efficiencies and cost reduction. However, improvement in the free cash flows will begin to manifest in 2017 and beyond. The positive medium-term outlook on the economy, buoyed by improving business conditions and the strategic review and consolidation of the hardware business could lay the base for improved outcome in 2017. The total shareholder return anticipated for the stock is 9.49%. Hence, we have given the stock a “hold” rating. We are of the opinion that the company is fairly priced at prevailing market prices.

The company also proposed a PGK0.03 ($0.01) dividend per share, which at current price will yield 2.52%. The dividend plus the potential capital gain represents a total shareholder return of 9.49%.