Kalbe Farma (KLBF IJ), maintain UPF, slower growth yet not cheap - CLSA

CLSA Jakarta industrious consumer bee Merlissa maintains UPF call on Kalbe Farma (KLBF IJ) with TP Rp3,300.

KLBF is undergoing a transformation. The company recently hires Ongki Tedjasurya, an excellent marketer (ex Mayora and Indofood). Ongki is now KLBF’s nutritional and group marketing head division. He already initiates brand equity building and plans to launch e-store for nutritional products.

Despite the positives, we put an UPF call on the name due to the following reasons:

Valuation is rich, with the stock trading at 20x P/E12CL, matching its Indian peers and close to the highest end of its historical forward P/E trading band.
Compared to Indonesian consumer, the stock is now trading at 18% premium to the sector and its 1.2 x PEG put the stock at second highest after Unilever.
Slower earnings growth in 2011-12CL (from 30-50% in 09-10 to 12.5% this year), given limited Rupiah appreciation and higher selling expenses. Rupiah has strengthened by ~12.4% in 2010, while only ~6.4% this year, according to our estimates. We also assumed higher selling expenses at 27.5% in 2011CL, as its 1Q11 selling expenses has soared to the highest level since the last 5 years.
Its potential M&A is unlikely to provide significant contribution in the near-term, with a mere 1-2% top-line contribution according to the management.
Finally, KLBF has a huge amount of cash and the fact that cash usage is limited, there are risks that the company may spend on low yielding operational activities, such as spending ads on maturing products or expanding the lower margin business. Big cash balance could be a negative carry for the company for now.

Another issue is what will happen to KLBF treasury stocks (acquired in 2008-2010, currently 7.7% from outstanding)? In the past, management has indicated cancellation to boost ROE – already discussed for a while now. Deadline to make up the decision (divest/cancel) is 2013.