UOB KLBF More upsides in 2H10, TP IDR 2850

What’s New
Management has turned more bullish. We recently upgraded 2010 EPS by 2.4% to Rp130 following good 1H10 results, putting ourselvesat 3.2% above consensus. Recent management guidance has turnedout to be more bullish than our forecasts, with Kalbe Farma (KLBF)raising its 2010 EPS guidance by 4.0-7.7% to Rp130-140. Aside fromnew product launches and geographical expansion, this could mostly bedriven by more optimism over margins in the light of a strong rupiah and operational improvements, as management has also raised its 2010operating margin expectations from 17.0-17.5% to 17.5-18.5%.

What are potential new sources of growth? Potential new growthdrivers are generic drugs for the prescription pharmaceutical segment, herbal products for the consumer health segment, and medicalequipment for the distribution segment. A new generic drug factory inCikarang will be fully operational by mid-11, which will support growing demand, as new regulations require the use of generic drugs ingovernment healthcare facilities. KLBF has also launched seven newherbal products to capitalise on the growing industry trend.

Expanding to Vietnam and Nigeria. KLBF plans to expand to Vietnam and Nigeria under a JV in 2011 with local companies. KLBF will marketthe “Extra Joss” RTD energy drink product in both countries. Generic drugs will also be marketed in Nigeria.

TheraCim to be commercialised next year. Management expects itsTheraCim cancer therapy product to be commercialised in 2011. Theproduct is undergoing clinical trials in the US for approval by the Foodsand Drugs Administration (FDA).

Stock Impact
Potential positive surprises to our 2010 forecasts. Management’s new 2010 EPS guidance of Rp130-140 denotes positive surprise of 7.3% to our estimate of Rp130, or 11.2% to consensus. Although ourvaluation is based on 2011F EPS, there could also be potential upsidenext year if 2H10’s actual performance beats our estimates.

Strong rupiah performance will enrich margins. The rupiah hasappreciated by 4.6% ytd against the US dollar, which would benefitKLBF as it imports 90% of its raw materials (32% of COGS). For every1% appreciation in the rupiah against the US dollar, 2010-11F EPS would increase 0.8%.

Earnings Revision/Risk
No change.

Valuation/Recommendation
Maintain BUY and our target price of Rp2,850 based on 18.0x 2011F PE.The stock is now trading at 15.0x 2011F PE. On a PEG basis, current valuation is also attractive as the stock is now trading at 0.9x PEG, belowits five-year historical PEG of 1.1x.

Share Price Catalyst
Acquisition plans materialise.