Kalbe Farma ($KLBF): Improved health
- Unaudited 4Q15 results show q-q growth across the board: KLBF
reported a 4Q15 performance that displayed q-q growth across the board (exhibit 6), which brought the full-year 2015 net profit to IDR1,975bn, in line with our (101.3%) and consensus (97.3%) estimates. Going forward, we expect KLBF’s performance to further improve, helped by its dominance and competitive edge despite a structural change in the unbranded generics.
- Margin pressure likely to ease: KLBF
’s 4Q15 gross margin was down both on a q-q and y-y basis to 45.4% on IDR depreciation, a lack of price increases, and seasonality of tenders for medical devices. However, looking ahead, we expect margin pressure to ease, supported by a stronger IDR, improvement in purchasing power due to low inflation, and lower raw materials prices on the back of low oil prices.
Outlook: Company guides for 8-10% top & bottom line growth in 2016
According to management, KLBF
’s performance in January and February 2016 is not too far off its full-year guidance of 8-10% y-y growth for its top line (Bahana: 9%), and it is therefore confident that KLBF
’s bottom line should also grow in tandem (exhibit 5), in line with our expectation of 10% (exhibit 3). By division, KLBF
’s 2016 y-y top-line growth will likely mainly be supported by growth from its nutritional products which is expected to be in the mid-teens, followed by consumer health in the low teens, pharmaceuticals at 7-8% (in line with industry) and distribution at 5-6%. We note that management expects most of its top line growth to stem from volume growth with minimal price increases for now. However, as the economy improves, KLBF
sees room for price increases at its consumer health and nutritional (exhibit 10) divisions.
Recommendation: Upgrade to BUY with unchanged TP of IDR1,480
We see three positive catalysts that could reverse KLBF
’s recent market underperformance (exhibit 4): (1) Restart of injection (liquid) line operations, which contributes c.5% of 2015 sales; (2) Support from BPJS to achieve 15-20% y-y unbranded generics sales growth for 2016; (3) Management’s continued proactive stance in introducing new products such as the Love Juice (exhibit 13). Hence, we raise our rating on KLBF
from Hold to BUY, particularly given the continued re-rating of consumer stocks as investors trim holdings in banks on the back of policy-risk headwinds. On valuation, we retain our 12M TP of IDR1,480, based on a 40% discount to our valuation (3-year average PE) of Unilever ($UNVR
). Risks to our call: IDR weakness and government policy on possible drug price capping.