The rupiah’s recent strengthening against the US dollar will benefit Kalbe Farma (KLBF) as most of its raw materials are still imported. Our recent visit to the Company affirmed such improving outlook, coupled with strong 1Q09 results made us to upgrade our earning estimates on the company. Additionally, adopting lower risk- free rate assumption of 9.5% (from 12.0% previously) allowed us to upgrade our target price from Rp600/share to Rp1,200/share. We t! hus upgra ded our recommendation to buy from neutral.
Improvement in gross margin starting 2H09…. The rupiah’s appreciation against the US dollar in 2Q09 (average exchange rate was Rp10,690 from 1Apr - 2 Jun09 vs Rp11,630 in 1Q09) will benefit Kalbe Farma (KLBF) as most of its raw materials are still imported. We expect such improvement to occur in 2H09 due to the usual one-quarter lag on the impact of exchange rate on the company’s costs. We expect a 55-bp improvement in gross margin for FY09 to 48.6%. Please note, howe ver, that the gross margin still expanded in 1Q09 despite higher exchange rate as some of raw material prices weakened (skim milk powder, for instance, falling by 27.0% yoy in 1Q09). Moreover, KLBF also booked higher margin from its distribution division due to increasing contribution from trading which earned higher margin (20-25% gross margin for trading vs 11-12% for distribution).
.. with sales targeted to grow by 12-14% yoy. Despite dissapointing sales growth from nutrition division in 1Q09 (+9.2% yoy), total sales managed to grow by 14.1% yoy, thanks to strong growth from consumer health division (+26.1% yoy). Going forward, the management plans to increase marketing efforts of its nutrition products, expecting it to grow by 12.0% yoy (vs 20.5% yo! y in 2007 )..
Improved efficiency. KLBF has succesfully implemented end-to-end suply chain management (SCM), resulted in improvement in inventory turnover from previously 149 days in 1Q08 to 135 days in 1Q09. The Company targets its inventory turnover to be reduced to 130 days within two years.
Upgrade TP to Rp1,200/share. We upgraded our forecast on KLBF on the back of higher gross margin. We arrived at net profit of Rp895bn for FY09F, an increase of 19.5% from our previous forecast. Coupled with lower risk-free rate assumption of 9.5% (from previously 12.0%), we arrived at new target price of Rp1,200/share. At our target price, the stock will be traded at FY09F PER of 13.6x. At current price, the stock still offers 21.2% upside potential. We therefore upgraded our recommendation to buy from neutral.
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