Kalbe Farma: Flat operating margin in 1H11 - HOLD (Helmy) - BNP Paribas

Price 3450, TP 3650, Mkt cap $3,804m, Avg t/o $6.8m

Kalbe reported good net profit growth of 18% in 1H11 to IDR675b in 1H11, but this is inline with our and consensus expectation.
Key points:

* Kalbe top line growth of 5.1% appears to be below expectation, but this is due to the impact of the divestment of Kalbe's packaging business last year. Excluding contribution from packaging business last year, Kalbe top line growth in 1H11 would be around 10%. Nonetheless, this is still below management guidance of 12 – 15% growth this year which mainly driven by no ASP increase ytd. As we highlighted in our recent report “Flat ASP”, the move was taken as the Ministry of Health has signalled drug manufacturers not to increase prices. As expected, the management has now revised down its top line growth to 11-13% this year.

* Supported by stronger currency, Kalbe's gross margin continued to expand to 52.4% in 2Q11 (vs 51.8% in 1Q11). Better margin has supported gross profit to grow by 8% y-y to IDR2.58t in 1H11, and is inline with our expectation. However, higher opex spending (+10% y-y) has resulted in flat y-y operating margin at 17.8% in 1H11. Going forward, with the absence of ASP increase, we believe that Kalbe would spend more advertising expense to help its top line growth. The management also reduce its operating margin target to a max 18% (from 18.5% previously).

* While Kalbe’s operation only booked 5% growth, thanks to lower tax rate and minority interest, net profit saw a strong 18% growth y-y to IDR675b. But this is already expected and we see overall results to be inline with our expectation.

2011 new target:

- Top line growth of 11 – 13% (previously: 12 – 15%) (excluding packaging). (BNPP’s 10%)

- Operating profit margin of 17.5% - 18.0% (previously: 17.5% - 18.5%). (BNPP’s 18.1%)

- Net profit growth of 15 – 18% (no change) (BNPP’s 14%)

While we are convinced that Kalbe is one of the best companies in Indonesia, with is solid track record, we see limited upside from here. Without any ASP increase, Kalbe’s margin will largely driven by IDR performance. We also concern on the potential of rising advertising expense, which could pressure Kalbe’s operating margin going forward. Nonetheless, we believe that Kalbe will remain as a core holding in the sector given lack of alternative. We maintain our HOLD recommendation on the company with TP of IDR3,650.

2011E: Rec EPS 157, P/E 22.0, P/B 5.2, ROE 25.4, Yld 2.0
2012E: Rec EPS 173, P/E 19.9, P/B 4.6, ROE 24.5, Yld 2.3
2013E: Rec EPS 194, P/E 17.8, P/B 4.0, ROE 24.0, Yld 2.5