Kalbe Farma Buy On Emerging Value
The Indonesian Government is at an early stage of evaluating a few schemes to possibly control prices of licenced and branded generic drugs circulated in Indonesia, by considering upper price caps for those drugs and/or opening up the Indonesian pharmaceutical industry by allowing more competition in the market to enhance industry efficiency. As the potential impact on Kalbe Farma (Kalbe) is limited, we maintain our BUY call on the stock.
Kalbe’s sales of licenced drugs
Prescription pharmaceutical division only contributes c.25% of Kalbe’s consolidated total sales; to be more specific, licenced drugs contribute only c.7% of Kalbe’s total sales. It is not easy to reduce prices of licenced drugs as: i) they still cannot be produced by the state-owned pharmaceutical firms, and ii) the private licenced-drug producing pharmaceutical firms are not obliged to serve the domestic market.
Likely limited impact on Kalbe
Sales of branded generic drugs only contribute c.14% of Kalbe’s consolidated total sales. Based on our estimates, if the current 18% operating margin of Kalbe’s branded generic drugs is forced down to 13%, which is the operating margin of Kalbe’s unbranded generic drugs, the effect is limited to only a 5% reduction in Kalbe’s net income.
Fast-growing export sales at a CAGR of 27.7% over the last two years
Kalbe’s is aiming to double its export sales of nutritional and consumer health products to 10% of its total sales by 2020 from 5% currently.
New milk production facilities ready to commence operations
Two new production facilities in West Java are set to begin operations in 2016: i) a liquid milk production plant in Sukabumi, and ii) a powdered milk production facility in Cikampek. Kalbe’s liquid milk products have higher margin compared to its unbranded generic drugs.
Considering the four factors above, we see value emerging fast from Kalbe and maintain BUY with a TP of IDR1,600 (35% upside), which implies 33x/27x FY16F/FY17F P/Es respectively.
