Kalbe Farma (KLBF.IJ Rp 1,610; BUY TP Rp 1,800) Improving growth outlook from higher margins and steady revenue; reiterate Buy rating

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Kalbe Farma (KLBF IJ)

Improving growth outlook from higher margins and steady revenue; reiterate Buy rating

We see catalysts from steady 2H24 revenue (+8.8% yoy), improved margins, & potential FDA approvals for high-margin specialty products.
We estimate higher GPM and lower opex, which translate to 14.7%/13.7% upward revision in FY24-25F core profit.
We maintain our Buy rating on improving earnings growth outlook and raise our TP to Rp1,800.

Specialty products to drive the future growth

KLBF reported solid 1H24 core profit, driven by +7.6% yoy growth in 1H24 revenue, operational efficiencies, and normalizing inventory (i.e., no further Covid-related inventory write-offs). In the prescription segment, Unbranded Generic’s revenue grew +21% yoy, continuing its trend of outpacing the Branded (-3% yoy) and License segments (+16% yoy). KLBF expects revenue from Specialty products (~ 3% of 1H24 revenue), such as oncology and biosimilars, to gradually increase in the future. This is bolstered by the recent approval of Zerpidio (HLX10 for Lung Cancer) for commercialization by Thailand’s FDA. KLBF plans to also seek FDA approval in South Korea for Efesa GXE4 (for chronic kidney disease) and to expand into other Southeast Asian countries, the Middle East and Australia for its approved novel Biologics products, in collaboration with Genexine (South Korea) and Henlius (China).

13.7/14.7% increase in FY24/25F core profit driven by higher GPM and lower opex

Following 1H24 results, we have revised up our FY24-25F gross margin (GPM) assumptions by 70/50bps to 39.4%/39.3% as we expect the company to benefit from lower API costs. As KLBF also continued to reduce its opex (1H24: 25.5% vs 1H23: 27.3% to rev.), we have also lowered our Opex/rev estimate by 90/100bps for FY24-25F. These adjustments translate to our 14.7%/ 13.7% higher FY24-25F core profit of ~Rp3.2tr/3.5tr, reflecting 12.3%/8.5% yoy growth.

Maintain Buy with a higher TP of Rp1,800

We maintain our Buy rating on KLBF on improving earnings outlook. We raise our TP to Rp1,800 to reflect our higher earnings estimates, still based on a FY25F PE of 24x. The key positive catalysts for KLBF include 1) expected sustainable quarterly revenue growth at 8-9% yoy 2) margin recovery (from a low base in FY23) and 3) additional FDA approvals for specialty products, which generate higher margins. However, downside risk includes product mix that could hinder the projected margin improvement.

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