Reinitiate coverage with BUY, TP of Rp2,050
Tempo Scan Pacific (TSPC), a well-known over-the-counter (OTC) drugs manufacturer, should see earnings grow by a healthy 18% CAGR in FY09-12F, supported by faster growth in the OTC segment of 12.5% (vs. only 10% for ethical products in FY10F). Its star products include Bodrex, Bodrexin, and Hemaviton, and sales should continue to remain firm given their strong brand equity. Improving purchasing power among middle income earners is another catalyst for growth, we believe, ultimately translating into margins expansion in the consumer products and cosmetics (CPC) division. Note that the gross margin for the CPC division was an excellent 54.1% in 1H10, its highest level since 2002. Other positives are the generous dividend payout and improving cash management. With such a promising outlook we place a BUY on the stock with a DCF based TP of Rp2,050 (WACC: 12.3%, TG: 5.0%), implying 19.4-16.7x PER10-11F. The company’s track record is good and sales have grown 18% CAGR over the past 3 years. This is implying 3.4x of GDP growth during the same period and also exceeds the sales growth of Kalbe Farma (KLBF) of 14%.
Supported by a growing middle class
TSPC’s consumer products and cosmetics (CPC) division stands to benefit from a burgeoning middle class which is enjoying improving purchasing power. Gross margins are already high and reached an excellent 54.1% in 1H10, their highest level since 2002, supported by rupiah strength since 90% of the costs are dollar related. Thanks also to the company’s strong brand equity, this margin should be sustained into 2H10, we feel, if not improving further. Price increase, though relatively moderate, should also help. According to the Nielsen survey, the number of middle income consumers – with average spending of Rp1.5mn to above Rp3mn per month – surged 26% YoY in FY09. A larger middle class - which is estimated to total 30mn people - should mean hearty sales growth and margins sustainability, we believe. Note that this division has managed to deliver average sales growth of near 25% over the past 3 years compared to only 13% for the pharmaceutical division.
Better inventory management
TSPC has continued to make supply chain management efficiencies. Hence, the company’s inventory days fell to below 70 days in 1H10, its lowest ever level. We feel confident that such a figure (70-72 days) can be sustained until at least YE11, an improvement from YE09’s 75 days. By comparison, note that Kalbe Farma, as the largest listed pharmaceutical company, has much longer inventory days of 120-125 days. Coupled with rupiah appreciation, operating margin should edge up to 11.2% this year from 9.9% in FY09. This underpins our expectation of brisk core profits growth in FY10F-11F of 27.8-15.2%. The PEG11F is only 0.9x, or lower than the consumer average of 1.2x.
To make acquisitions or go private?
The company is sitting on a very large amount of cash (Rp1.4tn as of June 2010 or 40% of its total assets). This gives TSPC plenty of options in how it enhances its business portfolio – either through new product development or by making acquisitions. Although the company retains acquisition plans, the management defends its conservative acquisitions stance on the grounds of synergy uncertainties. Rather, Bogamulia Nagadi as the major shareholder has gradually picked up TSPC shares lifting its shareholding to 95.15% in June 2010 from 95.1% in FY08. Thus, the likelihood of a complete takeover in the future is quite high, we believe. Notwithstanding the corporate actions, the company should better utilize its cash, we think, either through higher capex spending or simply by returning the cash to its shareholders. Capex spending has been relatively low at around 2.6% of sales over the past 3 years with the dividend payout ratio reaching a fairly generous 40-60%.
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