Kalbe Farma 4Q12 results were impressive

Kalbe Farma: Clearer growth feasibility (KLBF, Rp1,250, Neutral, TP: Rp1,275)

We upgrade KLBF from Sell to Neutral. 4Q12 results were impressive. Continuous efforts to build up branding through aggressive promotion started to be fruitful. FY12 promotion/sales ratio rose 0.4ppt to 8.8%, but we also saw a significant pick-up in the YoY sales growth of consumer health and nutrition divisions to 44.9-49.7% in 4Q12, from 12.7-12.8% in 3Q12, despite minimal ASP increase. Valuation is not cheap at 29x FY13F PE, yet we see a much improved earnings growth feasibility, at 15-19% level p.a. over the next 2 years.

KLBF guided for 15-18% sales and NPAT growth this year. With 2-3% ASP increase and less volatile IDR, we expect gross margin to be 0.7ppt higher this year, but operating margin is unchanged as promotion expenses would remain high, in line with management strategy. KLBF also expects to grow its exports sales by 20% this year. Under the leader of Mr. Ongky, who earned his success in developing Mayora Indah (MYOR)’s international business, we think that KLBF should do well too.

We also raised FY13F capex to Rp1,350bn, in line with management’s budget of Rp1-1.5tn, versus from Rp783bn in FY12A. Our revised capex budget of 8.5% of sales is the highest historically (versus 5-year average of 4.7%), denoting management’s bullishness over the company’s outlook. Three new factories are being built, each for OTC, nutrition, and consumer health division.