Retail

The Company

City Pharmacy Limited (CPL) was established in 1986 and is one of the leading retail/wholesale companies in Papua New Guinea. CPL has a number of pharmacy outlets and retail branches located throughout PNG, and it also operates hardware supply stores and Bon Café outlets. The company has recorded strong growth in the last five years, with revenues doubling on increased consumer confidence, while liquefied natural gas developments have boosted demand for goods and services. CPL has continued to be one of the best-performing stocks on the local bourse.

CPL Group reported net profit after tax of PGK16.4m ($6.7m) in 2013, versus PGK19.4m ($7.9m) in the previous year. This drop was partly due to higher operating costs and losses at the Hardware Haus and Eagle Boys Pizza businesses. Furthermore, the delayed opening of Waigani Central Supermarket resulted in additional costs from expenditure on additional staff recruitment and training. Sales revenue was up 9% to PGK388.7m ($158.0m), versus PGK357.2m ($145.2m) in 2012. Total revenue for 2013, including other revenue, was up 9% to PGK394.9m ($160.5m) from PGK362.7m ($147.4m) the previous year.

CPL’s registered losses of PGK210,000 ($85,000) in 2013, down from PGK1.4m ($570,000) in 2012, from its Hardware Haus subsidiary, and CPL has now taken control of this business to address the problems there. The group also recorded a loss of PGK230,000 ($93,000) from its share in Paradise Cinema. Cash at the end of December 2013 was PGK9.1m ($3.7m) compared to PGK15.9m ($6.5m) at the end of the previous year. Total assets rose to PGK186.4m ($75.8m) from PGK163.9m ($66.6m) over the same period, while total borrowing increased to PGK11.7m ($4.8m) from PGK9.1m ($3.7m). The CPL board approved a dividend of PGK0.07 ($0.028) per share at its annual general meeting on April 28, 2014, to be paid in equal tranches in May and August 2014.

The new Waigani Central Stop n Shop was opened for business in March 2014. The shop covers an area of 5000-sq-metre, twice the size of the old shop. The new shop is modern and features fresh consumable items. It also hosts a City Pharmacy outlet.

The group launched the Eagle Boys Pizza franchise in the third quarter of 2013, which has enabled CPL to enter the quick service restaurant sector. Meanwhile, the group expanded its distribution centre from 5000-sq-metre to more than 9000-sq-metre in 2013.

The company also embarked on developing its key personnel. It sent two managers to the US under an arrangement with the Independent Grocers Alliance (IGA) to participate in a retail training programme. Key managers in the pharmacy division travelled to Sydney to attend specialised training there.

Hardware Haus also set about developing its human resources, with personnel travelling to the US for training in anticipation of the opening of a new Waigani Central Haus Depot store in the second quarter of 2014.

Company Strategy

The Group has allocated PGK14.7m ($6.0m) for various capital expenditure programmes in 2014. It plans to open two new Eagle Boys Pizza outlets this year. CPL will carry on replicating the IGA Stop n Shop model in other hotels and lodges in Port Moresby. The pharmacy division will continue its refurbishment programme around the country and will look at various sites for expansion.

CPL’s pharmacy wholesale business in Sydney will launch an online e-commerce platform in 2014. The platform will help the company supply products to other countries where it has branches while helping the distributor retain its buying power. The launch of an online platform should additionally increase product sales and improve the visibility of the group’s cash flow.

CPL has achieved impressive growth in assets and profits in the last five years. The group’s balance sheet remains strong and its debt is negligible. Our 12-month price target of PGK2.04 ($0.83) per share represents a 13% premium to the current price of PGK1.80 ($0.73). We forecast a total return of 18% in 2014 (share price growth plus dividend yield) and maintain our view that CPL should be a cornerstone investment in portfolios.