Kalbe Farma (KLBF IJ): Earnings revisions on better hospital traffic and stronger IDR

We revise our 2020E/21E EPS estimates upwards by 5-6% for KLBF on the back of a stronger IDR and structural changes toward higher spending on OTC products offsetting the impact of its weaker-than-expected top line. We maintain our BUY call with a higher TP of IDR1,850.

Pharma top line on track to recovery, but still in the red. KLBF recorded 3Q20 prescription pharma revenue of IDR1.2tn (+3.3% q-q, -2.6% y-y), which notably coincided with c.16% q-q recovery in the combined inpatient admissions of Siloam Hospitals (SILO IJ) and Mitra Keluarga Karyasehat (MIKA IJ). Based on our conversations with hospital managements, including MIKA’s, q-q trends in 4Q20 patient traffic were flattish against the baseline, which should secure the pharma segment’s top line. We expect improving patient volume to hospitals, driven by normalizing doctors’ practicing hours and relaxation of social restrictions, to deliver 2020E/21E revenue growth of -1%/5% y-y for KLBF’s pharmaceutical business. All in, we now forecast 5%/7% y-y growth in 2020E/21E for KLBF’s consolidated topline.

Consumer health will be proxy of post-COVID-19 spending recovery. We forecast KLBF’s consumer health segment to deliver 8%/9% y-y 2020E/21E revenue growth, supported by: 1) less downtrading and 2) better health awareness leading to higher spending on OTC medication. This follows a similar trend in the US of 17-18% y-y growth in industry-wide sales of cough and cold remedies in March 2020. The uptick in OTC sales against a backdrop of a flattish trend for energy drinks’ top line should expand the consumer health gross margin to 57.5% vs. 56.9% in 9M20. On a consolidated basis, we forecast 2020E/21E gross margins of 45.7%/46.1% as we factor in: 1) lower 2021E average USD/IDR exchange rate of IDR14,300 vs. 2020E’s IDR14,600 and 2) normalizing skimmed milk powder prices returning nutritional business to its 2019 gross margin at c. 54.0% (9M20: 54.7%).

Solid positioning as supplier of COVID-19 vaccine. KLBF is investing c. IDR1tn capex to develop a COVID-19 vaccine with Korea’s Genexine, which began conducting phase 1 clinical trials in 4Q20, and seeks to launch it for monetization by 2H21. Indonesia’s Health Ministry is currently considering plans to allow private procurement and distribution of vaccines, a shift from the State-Owned Enterprises (SOE) Ministry’s previous stance of seeking total control over 2021’s rollout. Regardless of the government’s decision, we maintain our positive outlook as KLBF is best positioned to monetize the vaccine through Enseval’s (EPMT IJ, Not Rated) existing distribution network.

Maintain BUY with new TP of IDR1,850. We fine-tune our model and raise 2020E/21E EPS by 5-6% to account for KLBF’s USD and raw-material expenses declining at a faster rate than its weaker-than-expected top line. We maintain our BUY call on KLBF with a higher 12-month TP of IDR1,850 (previously IDR1,810), which we derive through a 2021E PER-multiple based approach using 28.5x (5-year average; from 30x). Downside risks include longer-than-expected social restriction orders exerting downward pressure on gross margin.