Equity Research

PT KALBE FARMA TBK 

A mighty concept: health for all

 KLBF 9M19 sales/ net profit of Rp16.8tn (+7.3% YoY)/ Rp1.9tn (+6.2% YoY) came in-line as expected, made up to 74% of FY19 Rp2.4tn consensus forecast. GPM remained stable from 11.5% in 9M18 to 11.4% YoY, and strong earnings growth driven by cost efficiencies despite flattish revenue growth. We expect KLBF continued its discipline in managing costs by reducing promotional expenses.  Hence, we reiterate KLBF coverage and roll forward our valuation basis to FY20F. BUY recommendation with new TP of Rp 1,800/share this implies PER and EV/EBITDA 2020F of 22.7x and 15.3x, respectively.

Earnings broadly in-line due costs efficiencies

KLBF booked 3Q19 revenue remained somewhat stable at -2.8% QoQ to Rp 5.8 tn, totaling to Rp 16.8tn in 9M19, which is in-line with consensus estimates at 71.5% of full year forecast.  Segment-wise; 1) Nutritional’s sales grew by+4.6% YoY to Rp 4.6tn while the GPM dropped by -1.3% YoY mostly due higher skimmed milk price (+24% YoY) and weakening product mix 2) Pharmaceutical’s revenue grew by 6.6% YoY to Rp 3.9tn in 9M19, while GPM stable at 54.2% on the back of higher licensed drug and un-branded generics, sales jumped by 17% YoY and 4% YoY, along recovering from the hospital sector. 3) Consumer health only grew 1.9% YoY to Rp 2.7 tn with GPM slightly improved 5bps to 7% given the lower sugar price trend -6.8% YoY in 3Q19.  In bottom-line company’s booked 3Q19 net profit Rp 657 bn (+11.7% YoY), bringing 9M19 net profit to Rp 1.9tn (+6.2% YoY), forming 74% for FY19 consensus estimates.  Nevertheless the strong earnings growth was driven by cost efficiencies, particularly in marketing spending (-3% YoY).

Benefited from upcoming tax cut incentives and increasing from BPJS premiums

The Government will impose up to a 300% tax deduction for companies who invest in R&D (Government Regulation No.45/2019). R&D spending amount of 1.2% of sales, company might enjoy Rp 99bn in incentives which could paving the way for higher earnings growth next year at least +3%. KLBF could also benefit from increase the BPJS Kesehatan premiums, this bring positive impact, as the company regularly provides drugs and healthcare products. On the other hand, the adoption of multi-winner bidding in the e-catalogue system and price ceiling adjustments might also be future catalysts.

Reiterate – with TP Rp 1.800/share

KLBF’s continued its discipline in managing costs by reducing certain ineffective promotional expenses. While the result is still on track, we reinitiate a BUY recommendation with a new TP of Rp 1.800/share.  This implies PER and EV/EBITDA 2020F of 22.7x and 15.3x, respectively.  Based on yesterday’s closing price, KLBF was traded at a valuation of 27.4x PER and 18.7x EV/EBITDA 2019F. 

Key Risks: 1) Raw material costs fluctuation,  2.) USD and IDR volatility, and 3.) changing regulation from government