Kalbe Farma (KLBF IJ), Turnaround?, from Swati Chopra TP Rp. 2700 - CLSA Indo

Swati is now seeing the long awaited execution improvement in KLBF as the company brings aboard some of the best people in the industry (for marketing and M&A) to restructure its business.

Between a stronger currency and low hanging fruits from restructuring, a bull case could see earnings grow by 35% this year vs. a base case of 14% growth.

If the currency goes to 8,000 to the USD the company will capture all of the margin gains; they won't be reducing any prices. COGS is 90% dollar sensitive.

With US$200m cash in hand, no debt, US$300m in operating cashflow and another US$270m in treasury stock the company could easily close on a transaction of up to US$500mn without breaking a sweat.

However, valuation still does not look cheap here. With the stock trading at 20.1x 2011CL PE and above 1x PE/G, Swati maintains U-PF based on valuation. TP stays at Rp2,700, downside of -11%.

Key points from report:
Well respected ex-marketing director of Mayora has been hired by KLBF, a positive sign
Also hired Ex-Unilever Indonesia’s M&A head; tasked to increase footprint in Indo’s fragmented pharma industry of over 200 players
Bankers appointed for its distribution arm (Enseval) to undertake a rights issue (expected Rp300bn [US$34m]) to raise funds to expand the distribution network
Still too early to assess potential impact, and important that new people given adequate flexibility and independence.
Deals of up to US$500m is possible considering its significant cash pool of US$200m and US$300m in operating cashflow
A 5% appreciation has 9% impact on earnings. Bull case of Rp8,000/US$ would see 35% YoY growth this year, implying a 2011CL PE of 16.5x