Kalbe Farma: Solid Turnaround Amid Profit-Margin Headwinds

PT Maybank Sekuritas Indonesia – November 3, 2024

Kalbe Farma (KLBF IJ) has shown a solid turnaround despite facing profit-margin headwinds. This report, prepared by PT Maybank Sekuritas Indonesia, delves into the key aspects of Kalbe Farma’s performance, financial metrics, and future prospects. The analysis maintains a “BUY” rating with a revised target price (TP) of IDR 1,800.

Maintain BUY with Lower TP of IDR 1,800

The recommendation to maintain a “BUY” rating on Kalbe Farma stems from the company’s strong earnings turnaround driven by strategic investments and initiatives. Although the FY24-26E EPS forecast has been revised down by 11-12% to reflect lower-than-expected profit margins in 3Q24 and 9M24, the target price is adjusted to IDR 1,800, based on a target 23.7x FY25E PER, its 3-year mean. Kalbe Farma’s innovative business ventures position it well to capture growth opportunities in Indonesia’s pharmaceutical market, justifying the target PER.

Solid 9M24 Turnaround Despite Profit Margin Misses

Kalbe Farma’s 9M24 earnings improved by 15% YoY to IDR 2,378 billion, aligning with consensus but falling short of MIBG’s expectations. The company’s 9M24 sales reached IDR 24,239 billion, a 7% YoY increase, meeting market expectations. However, the 9M24 EBIT margin of 12.4% lagged behind MIBG’s forecast due to contracting profit margins in its distribution unit.

Earnings Strong Despite Headwinds

Kalbe Farma’s 3Q24 earnings of IDR 573 billion, a 32% QoQ decrease but a 7% YoY increase, were seen as a positive development. The company demonstrated growth in its main businesses, despite gross margin pressure and a surge in operating costs to IDR 2,343 billion. The double-digit YoY growth in prescription and consumer health sales, which contributed 42% of total 3Q24 sales, was notable. However, rising sales of lower-margin prescriptions and distribution impacted overall profit margins.

EPS Cuts and Future Growth

In light of the lower-than-expected 3Q/9M24 profit margins, the distribution gross margin estimates were revised down, leading to lower FY24-26E earnings forecasts. Despite this, the revised forecasts still indicate a solid turnaround trajectory with a 13% FY23-26E EPS CAGR. Kalbe Farma’s growth visibility remains high, driven by its rapidly-growing biologic, emerging health supplement, specialty nutrition, and large over-the-counter expansions in the ASEAN markets.

Company Description and Statistics

Kalbe Farma manufactures and distributes pharmaceutical and consumer products. The company’s share price is IDR 1,570, with a 12-month price target of IDR 1,800, indicating a 17% upside. The previous price target was IDR 2,050. The company’s market capitalisation stands at IDR 73.6 trillion (USD 4.7 billion) with a free float of 46.7%.

Financial Metrics

The company’s revenue for FY22 was IDR 28,934 billion, increasing to IDR 30,449 billion in FY23 and expected to reach IDR 37,996 billion by FY26. EBITDA is projected to grow from IDR 4,425 billion in FY23 to IDR 5,604 billion in FY26. Despite margin pressures, Kalbe Farma is expected to maintain a solid balance sheet, driven by its cash-generative business model.

Value Proposition and Growth Drivers

Kalbe Farma leverages its wide distribution network and leadership in pharmaceutical and consumer health to expand into preventive, curative, wellness, and supplement products. The company’s adaptability to the evolving market landscape has been key to sustaining steady returns on capital. Strengthening its product portfolio through ventures in biosimilars, medical devices, and dietary supplements is expected to boost overall prospects. The company has also resumed production after a recall of injection products and closure of production lines in 2015.

Price Drivers and Historical Share Price Trend

Key events that influenced Kalbe Farma’s share price include forming a partnership with Genexine Inc. to develop a Covid-19 vaccine, commencing the Covid-19 mass vaccination program, and delivering strong earnings growth despite cost pressures. The 1H24 earnings turnaround, driven by broad-based profit margin recovery, has also been a significant price driver.

Financial Metrics and Swing Factors

Kalbe Farma’s consumer-related business is expected to drive growth, while pharmaceutical business headwinds persist. Margins for the prescription business may tighten as consumers shift to cheaper alternatives. Monitoring the IDR is crucial, given the large percentage of raw materials imported. The company maintains a solid balance sheet despite expansion into new businesses.

ESG Considerations

Kalbe Farma demonstrates strong governance with a clean track record for over 30 years. The company has implemented the ASEAN Corporate Governance Score Card since 2012 and adheres to ISO standards for environmental management and occupational health and safety. Kalbe Farma actively participates in the National Health Insurance program by supplying cheaper, effective, unbranded drugs, despite lower profitability.

Financial Projections

Kalbe Farma’s revenue is projected to grow at a CAGR of 7.7% from FY24 to FY26, with profit margins expected to improve as the company optimizes its business mix. EBIT and net profit are also forecasted to grow, driven by the company’s strategic initiatives and expansion into high-growth markets.

Conclusion

Kalbe Farma’s solid turnaround, despite profit-margin headwinds, highlights the company’s resilience and strategic foresight. The maintained “BUY” rating with a revised target price of IDR 1,800 reflects confidence in the company’s ability to navigate challenges and capitalize on growth opportunities. Investors should consider Kalbe Farma’s strong market position, innovative ventures, and robust financial metrics when making investment decisions.