KLBF - Stronger growth and margins expansion

We re-initiate Kalbe Farma (KLBF) with a BUY and TP of IDR2,350 (28.1x ‘23F P/E) on the back of 1) stronger footage from Sanofi Indonesia acquisition; 2) product optimization in JKN procurement and; 3) margins improvement amid easing cost pressure and 3-5% ASP increase. KLBF is expected to book stronger performance in 2H23 resulting ‘23F revenue and net profit to grow by 13.3% yoy and 15% yoy, respectively. All in all, we expect KLBF’ gross and net margin to expand to 40.9% and 11.9%, respectively in 2023F due to lower raw material cost possibility, better product mix and cost management. Pharmaceutical prescription as the growth engine KLBF’s 100% acquisition of Sanofi Indonesia in Dec ‘22, was one of the company’s strategies to strengthen its pharmaceutical prescription division’s portfolio in therapeutic drugs for diabetic and cardiovascular along with new access to vaccines. KLBF also guided for a 3-5% ASP increase on selected products in 2023. Furthermore, the government revises JKN’s product procurement process, which now is more flexible for KLBF on price bidding and product inclusion where KLBF has become the biggest supplier with around 100 SKUs or 12.5% of total drugs in e-catalog. As a result, we expect the pharmaceutical division’s revenue to grow by around 30% yoy in ‘23F on the back of sales contribution from Sanofi Indonesia, product optimization in JKN procurement, and higher ASP. Maintaining solid positioning in consumer health and nutritional divisions There are also strategies to strengthen its product portfolio in its consumer health and nutritional division. In consumer health division, KLBF will continue to focus on Over The Counter (OTC) products and preventive products. As for nutritionals division, KLBF will continue to focus on high nutrition products with affordable price as to cater market needs. KLBF has also guided a 3-5% higher ASP for selected products in both divisions. As a result, we expect KLBF nutritional and consumer health’s revenue to grow by 8% yoy and 10% yoy in 2023F, respectively. Flattish qoq performance in 2Q23F but expects stronger traction in 2H23F We expect KLBF’s 2Q23F revenue to grow by 14.8% yoy/0.02% qoq to IDR7.9 tn and 2Q23F net profit to grow by 7.2% yoy/0.4% qoq to IDR859.4 bn, despite with lesser working days and potentially higher cost from operation. However, we still expect KLBF’ 2023F revenue and net profit to grow by 13.3% yoy and 15% yoy amid stronger pharma prescription growth traction, 3-5% ASP implementation in selected products and lower raw material cost. We expect gross, EBIT and net margins to expand by 40Bps, 70Bps, and 20Bps in ‘23F. Note that in 1Q23, KLBF’s revenue grew by 12.2% yoy, but net profit only inched up by 2.5% yoy due to forex loss and inventory write-off. Re-initiate BUY with TP of IDR2,230 We re-initiate KLBF with a BUY and target price of IDR2,350 (+17.5% upside) implying 28.1x '23F P/E or at +1.5Stdev of its 5 years historical mean. Note that, several risks to our call includes; 1) increase in raw material cost; 2) a weakening IDR vs USD, and 3) unexpected inventory write-off. KLBF is currently trading at 22x 12M forward P/E or below its 5 year historical mean.