Kalbe Farma first quarter of 2013 is on the Right Track

Kalbe Farma: 1Q13 on track (KLBF, Rp1,360, Neutral, TP: Rp1,275)

KLBF released its 1Q13 results yesterday. It posted a healthy 1Q13 growth that was mostly driven by volume. Decline in margins was still manageable, despite labor cost pressures and weak Rupiah. Indonesia Market Summaries quote: Management remains confident with its 15-18% earnings growth target for this year, on track with us and the street. We reiterate our Neutral call. Earnings growth feasibility has improved, yet valuation is no longer cheap – at 32.1x FY13 PE or 27.4x FY14F PE – after outperforming JCI by 12.6% YTD. Our FY13F-14F EPS are 1.0-3.4% lower than the street.

On the right track. 1Q13 sales, EBIT, and NPAT rose 16.2%, 11.7%, and 10.1% yoy to Rp3,490bn, Rp576bn, and Rp444bn, respectively. Each formed 22% of our and consensus’ full-year forecasts. Management remains confident to achieve its 15-18% earnings growth target. We forecast for 15% earnings growth, a tad lower than consensus’ 17% forecast.

Strong volume growth should continue. 16.2% sales growth was mostly fueled by rising volume. Price increases were selective at about 3%, while some 1% growth came from new products contribution. Prescription pharmaceutical, consumer health, and nutrition sales grew 19.2%, 20.1%, and 22.6%; stronger versus 1Q12 YoY growth rate of 16.2%, 8.4%, and 20.6%. We expect the current growth rate to be sustained for the coming quarters, given ongoing investment in brand and promotion strategy. Distribution division's sales growth normalized to 8.6%, given the full-year impact of Abbott’s inclusion. Exports sales contribution rose to 4.2% from 3.4%, following 46% sales growth (versus 15% for domestic market), higher than KLBF’s 20% full-year growth target.

Margin should improve in coming quarters. Margin decline in 1Q13 came as a result of sales mix (i.e. low-margin unbranded generics sales portion up to 11% from 9% in 1Q12), weak rupiah, and rising labor costs and marketing expenses. We expect better margins in the coming quarters as KLBF has selectively raised ASPs by about 3% in 1Q13. Historically, 1Q sales are also the lowest, with average 22% realization to the full-year.