BNP Paribas Kalbe Farma (KLBF IJ) - In the sweet spot - BUY with TP IDR1,940

Kalbe Farma
KLBF IJ, BUY, CP 1,700, TP 1,940, Mkt cap: US$1,777m, ADV:US$3.10m

We maintain our BUY call on Kalbe Farma, and it is remains as one of our TOP PICKS in the market. Supported by strong management with proven track record, we believe Kalbe will be able to deliver good growth this year.

With the possibility of an upgrade on Indonesia’s sovereign debt to investment grade within a year, we believe IDR would be one of the positively affected areas and it could appreciate further from current level. With high portion of imported raw material, Kalbe should benefit from stronger IDR as its margin should expand on lower cost. In the past, we see strong correlation between Kalbe’s margin and IDR. Our sensitivity analysis shows that every 1% IDR appreciation will translate to 1.8% higher earnings.

Indication on 2M10 top line showed a good growth of 10-11% y-y, with most of the growth was driven by volume as Kalbe only implemented a 1-2% ASP increase so far this year. Kalbe is likely to have more aggressive price increase in 2Q10, and expect a total ASP increase of 4-5% in 2010. As such, 2Q numbers should even be stronger on stronger IDR and higher ASP increase.

While our earnings is already 8% higher than consensus, we still see an upside risk to our forecast as the management is now guiding for 2010 net profit of IDR1.16t – 1.23t which is 2 – 6% higher than our full year forecast.

Kalbe new products launch have been on track, and this year it has launched Zee (powdered milk for kids and teen), Mixagrip Pegal Linu (analgesic and muscle relaxant) and Entrostop Anak (anti diarrhea for kids). With several new launching in the pipeline we believe that Kalbe should have no difficulty achieving this year’s target of 13-15% top line growth. Potential acquisition should also positive for Kalbe's earnings and share price. With a net cash position, Kalbe’ balance sheet obviously has the capacity and can support the acquisition. Kalbe can also gear up further for bigger acquisition. So far, the management has prepared IDR1t for acquisition plans.

At this level, Kalbe valuation still looks interesting at 2010 PE of 14.3x, substantially lower than recent peak PE of 20x back in 2007. BUY, with TP IDR1,940, based on 0.75x 2010 PEG.

Please find the attached file for the report.

2009E: P/E 18.8, P/B 3.7, ROE 21.6, Yld 0.7
2010E: P/E 14.2, P/B 3.0, ROE 23.5, Yld 0.8