Kalbe Farma: Solid Turnaround Despite Profit-Margin Headwinds

Broker: PT Maybank Sekuritas Indonesia

Date: November 3, 2024

Maintaining a BUY Rating with a Lower Target Price

Kalbe Farma (KLBF IJ) has demonstrated a solid turnaround despite facing profit-margin headwinds. PT Maybank Sekuritas Indonesia maintains a BUY rating but has lowered the target price to IDR 1,800. This adjustment reflects a revision in the earnings per share (EPS) estimates for FY24-26E by 11-12% due to lower-than-expected profit margins in 3Q24/9M24. Despite this, the target price is based on a 23.7x FY25E PER, which is its 3-year mean. The company’s innovative business ventures position it well to capture growth opportunities in Indonesia’s pharmaceutical market.

9M24 Earnings: A Solid Turnaround

Kalbe Farma achieved a notable 15% year-over-year (YoY) increase in 9M24 earnings, reaching IDR 2,378 billion. While these earnings aligned with market consensus, they fell short of Maybank IBG’s expectations, hitting only 65% of the pre-revised FY24 forecast. This was primarily due to a contraction in the profit margin for the distribution unit, resulting in a lower-than-expected EBIT margin of 12.4%. Despite these challenges, 9M24 sales grew by 7% YoY to IDR 24,239 billion, meeting market expectations.

3Q24 Performance: Strong Earnings Despite Headwinds

Kalbe Farma’s 3Q24 earnings stood at IDR 573 billion, marking a 32% quarter-over-quarter (QoQ) decline but a 7% YoY increase. This performance is commendable given the company’s growth visibility in its main businesses, gross margin pressure, and a 13% QoQ surge in operating costs. Prescription and consumer health sales, which contributed 42% of total 3Q24 sales, experienced double-digit YoY growth.

EPS Cuts and Future Projections

Reflecting the lower-than-expected 3Q/9M24 profit margins, Maybank IBG slashed the distribution gross margin estimates, leading to lower FY24-26E earnings forecasts. Despite this, the revised earnings forecasts still imply a solid turnaround for Kalbe Farma, with a 13% FY23-26E EPS CAGR. The company’s growth visibility remains high, driven by its rapidly-growing biologic, emerging health supplement, and specialty nutrition businesses, as well as its large over-the-counter expansions in the ASEAN markets.

Share Price and Company Statistics

Kalbe Farma’s share price is currently IDR 1,570, with a 12-month price target of IDR 1,800, representing a 17% increase. The company’s market capitalization stands at IDR 73.6 trillion (USD 4.7 billion), with a free float of 45.0% and issued shares totaling 46,875 million. The founding family holds a 56.7% stake in the company.

Financial Performance and Projections

Revenue and Earnings

Kalbe Farma’s revenue for FY22A was IDR 28,934 billion, increasing to IDR 30,449 billion in FY23A. The projected revenue for FY24E, FY25E, and FY26E is IDR 32,675 billion, IDR 35,175 billion, and IDR 37,996 billion, respectively. The company’s core net profit for FY22A was IDR 3,382 billion, which decreased to IDR 2,767 billion in FY23A. The projected core net profit for FY24E, FY25E, and FY26E is IDR 3,199 billion, IDR 3,553 billion, and IDR 4,016 billion, respectively.

Profit Margins

The gross margin for FY24E, FY25E, and FY26E is projected to be 37.7%, 38.5%, and 40.2%, respectively. The EBIT margin for the same periods is projected to be 12.2%, 12.5%, and 13.3%. Net income projections for FY24E, FY25E, and FY26E are IDR 3,199 billion, IDR 3,553 billion, and IDR 4,016 billion, respectively.

Segment Analysis

Kalbe Farma’s revenue breakdown includes prescription (24%), consumer health (16%), nutrition (30%), and distribution (30%). The prescription segment’s EBIT margin for 3Q24 was 50.1%, while the consumer health segment had an EBIT margin of 58.7%. The nutritional segment’s EBIT margin was 51.2%, and the distribution segment’s EBIT margin was 9.9%.

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 constant adaptation to evolving opportunities has been key to sustaining steady returns on capital. Strengthening its product portfolio, Kalbe Farma is a first mover in the biosimilar market and has ventured into medical device businesses. The addition of liquid milk and a joint venture with Blackmores to enter the dietary supplement market further boosts its prospects.

ESG Initiatives and Governance

Environmental Initiatives

Kalbe Farma obtained ISO 14001 for environmental management in 2015 and reported zero breaches of environmental regulations. The company has significantly reduced non-renewable energy usage and has implemented a Waste Water Treatment Plant in its manufacturing facilities.

Governance

Kalbe Farma has implemented the ASEAN Corporate Governance Score Card since 2012. The company is run by a board of directors (BoD) supervised by a board of committee (BoC), which includes independent audit members. The BoC consists of six members, two of whom are independent. The BoD also consists of six members, all of whom are independent with over 30 years of experience.

Social Contributions

Kalbe Farma has a high gender diversity with 33% female employees and adheres to local minimum wage regulations. The company enforces ISO 45001 for occupational health and safety and has reported no workplace accidents since 2019. Kalbe Farma actively provides education and training to communities and partners with local farmers, contributing to CSR-related expenditures accounting for approximately 1% of net profit in 2023.

Risk Factors and Swing Factors

Upside Risks

• Shift by consumers back to branded generic products
• Faster-than-expected completion of the Biosimilars plant
• Further decline in skimmed milk prices may offset competition impact on margins

Downside Risks

• Consumer safety issues could damage reputation or disrupt production
• Changes in regulation leading to a faster decline in the growth of OTC products
• Further depreciation of IDR as Kalbe Farma imports most of its raw materials

Conclusion

Kalbe Farma has shown resilience amidst profit-margin headwinds, demonstrating a solid turnaround in earnings. Despite lowering the EPS estimates and target price, the company’s innovative strategies and strong growth drivers position it well for future growth. Investors should watch for developments in the company’s product portfolio, market expansions, and ESG initiatives, while keeping an eye on potential risks.