Kalbe Farma Consumer Health And Nutritionals Are Growth Drivers

Kalbe’s source of growth is its consumer health and nutritionals divisions, which collectively contribute c.47% of total sales. We are less concerned with its pharmaceutical division (contributes c.25% of total sales) as we see Kalbe can alter its product mix for the BPJS sales, resulting in relatively stable margins for this division. Considering its very disciplined and improving inventory days and the strengthening IDR vs USD, we maintain BUY and IDR1,600 TP (25% upside), implying 34x/29x 2016F/2017F P/Es.

Consumer health division
Kalbe Farma (Kalbe) expects its consumer health division to grow its sales by 10-11% in 2016. Its ready-to-drink products, such as Hydro Coco (coconut-flavoured isotonic drink) and Original Love Juice, have been growing c.25% pa. For its Extra Joss energy drink, Kalbe aims to introduce the Extra Joss Blend, which is blended with milk (produced from its nutritionals division) and aimed at its younger customer segment.

Nutritionals division
Kalbe believes its milk/nutritionals division can grow c.15% (ie 12% sales volume growth and 3% price increase in 2016) vs c.12% in 2015, all coming from volume growth and no price increase. The liquid milk manufacturing plant will produce the liquid version of its leading powdered Diabetasol, Prenagen and Morinaga milk products.

Pharmaceutical division
We are less concerned with Kalbe’s pharmaceutical division, which contributes c.25% of Kalbe’s total sales. We learn that Kalbe can alter its product mix for the Indonesian universal healthcare programme (BPJS) sales tender, resulting in relatively stable margins for this division. For example, Kalbe can target a better mix of the BPJS sales proportion of the non-negotiable unbranded generic drugs with its higher-margin cancer treatment drugs – for which Kalbe has pricing power, as it is the only local firm able to produce such cancer treatment drugs.

Remain BUY
We trim 2016F/2017F earnings by 3%/7% to factor in higher sales from the distribution division and lower sales from the pharmaceutical division. However, we keep our DCF-based IDR1,600 TP (WACC: 12.8%, TG: 3%), after accounting for Kalbe’s better inventory days from FY16F onwards.

Key risks
As Kalbe imports 95% of its raw material, any depreciation of the IDR against the USD could jeopardise its margins. Lower consumer purchasing power could also hinder Kalbe’s plan of a price increase for its nutritionals division.