DBS KLBF’s Prospects are Still Emerging

Our recent meeting with Kalbe Farma (KLBF) management indicated that KLBF’s prospects are still emerging, despite the worsening economic outlook. Sustainable revenue growth will come from its decent product portfolio and solid market share, being the leader in the Indonesian pharmaceutical market. Note also that its healthy balance sheet will be the key to surviving and expanding in the current tight credit market.

Amidst the current crisis, KLBF management still expects revenue to grow at about 12% y-o-y, of which sales volume will contribute c. 62.5% to the growth, as we understand that the room for price increase should be limited this year. The management expects ethical drugs segment to deliver the largest segmental growth at around 13-14% y-o-y due to its large opportunities in product creations targeting more disease coverage vis-à-vis to the limited variations in OTC drugs. Continuous negative growth in energy drink segment is also expected to ease this year due to the recent launching of Joss Fit and Fatigon Hydro+ to counter competition in the isotonic drinks segment.

KLBF indicated that the 17% y-o-y drop in 9M08 net profit (despite the 11% y-o-y revenue growth) was due to the upward pressures in commodity prices, as the main component of raw and packaging materials, and accounted for 23.7% of 9M08 revenues. Starting from 4Q08, the drop in commodity prices had eased cost pressures but another setback came from the weakening Rupiah exchange rate that led to high conversion rates in purchases of raw and packaging materials which are almost 100% imported. In the mean time, the management has indicated that the drop in commodity prices has been able to offset the loss in currency conversion, leading to a neutral impact on production costs.

In regards to the US$19.2m JP Morgan lawsuit claim, KLBF management indicated that it has never signed the derivative transactions agreement and it has responded by filing back a US$20m lawsuit claim against the bank. KLBF has also pointed that no contingency reserves has been allocated and that the balance sheet condition will be sufficient to buffer the US$19.2m loss, which only represent c. 23.1% of total 9M08 cash balance (at Rp11,000/US$ exchange rate). From the company’s 3M08 financial statement notes, we found that the company had some derivatives contract with the bank which amounted to US$7m in total.

KLBF has recently completed the construction of its 11th production facilities “Orange Kalbe Ltd” in Nigeria , which is 30-70 joint-venture with Orange Drugs Co. Ltd. With the establishment of this OTC production factory, KLBF looks forward to strengthening its market share in the African market, although we understand that contribution from total exports sales are still insignificant with only c. 3.3% of sales in 9M08.