HOLD Target Price, IDR 1,900 Upside 5.2%

Friday, 20 February 2015 HOLD Target Price, IDR 1,900 Upside 5.2% KLBF IJ/KLBF.JK Last Price, IDR 1,805 No. of shares (bn) 46,875 Market Cap, IDR bn 84,609 (US$ mn) 6,594 3M T/O, US$mn 5.1 Last Recommendation 08-Jan-2015 HOLD Rp 1,900 14-Nov-2014 BUY Rp 1,900 13-Feb-2014 HOLD Rp 1,350 KLBF relative to JCI Index IDR 1,900 1,800 1,700 1,600 1,500 1,400 Market Recommendation BUY HOLD SELL KLBF (LHS) 2/19/14 3/20/14 4/17/14 5/15/14 6/12/14 7/10/14 8/7/14 9/4/14 10/2/14 10/30/14 11/27/14 12/25/14 1/22/15 2/19/15 Consensus 3 Relative to JCI Index (RHS) Our Cons % Diff Target price, IDR 1,900 1,840 3.3 EPS 2015F, IDR 53 54.1-2.0 PE 2015F, x 34.0 33.3 2.1 11 12 % 15 10 5 0-5 -10 CONSUMER SECTOR /COMPANY UPDATE Kalbe Farma Seeking greater clarity Kalbe has announced its 2014 indicative results (unaudited) and provided guidance for 2015. Overall, the 2014 figures are inline with our expectations despite figures for the distribution segment being lower than expected. On the back of 8.5% y-y growth in sales to IDR17.4tn, net profits climbed 6.9% to IDR2.1tn. Furthermore, the overall gross margin also improved in 2014 thanks to the lower contribution from the distribution segment. For 2015, the management conservatively targets sales growth of 11-13% - similar to the estimates in last year s revised outlook. We are reviewing our numbers following the results announcement. Maintain HOLD for the time being. Inline result overall Kalbe reported consolidated sales of IDR17.4tn in 2014, or up 8.5% y-y from IDR16tn in 2013 - inline with our expectations. The solid growth reflects strong performance in the prescription pharmaceuticals, nutritionals, and consumer health segments, which grew 11.9%, 20.8%, and 16.7%, respectively. By contrast, the distribution segment continued to underperform, recording negative y-y sales growth of 5.2%. Profitability wise, Kalbe s gross margin improved 80bps to 48.8% thanks to the lower contribution of the distribution segment. Furthermore, the operating margin was kept stable at 15.9% despite a higher opex to sales ratio. At the bottom line, the net margin was slightly lower at 11.8% due to higher interest expenses. As such, the net profit grew by 6.9% to IDR2.1tn, or inline with our expectations. 2015 outlook: the management takes a conservative view The management conservatively targets sales growth of 11%-13% in 2015 - similar to the estimates in last year s revised outlook. No detailed sales growth targets by segment have been provided, but the company has provided guidance of moderate sales growth in each segment (low-teens in prescription, mid-teens in consumer health, high teens in nutritionals and flat growth in distribution). The operating profits margin is expected to reach 16%-17%, while EPS growth is expected to reach 14-16%. In 2015, the company has earmarked capex of IDR1-1.3tn. From the total capex, 50% is allocated to the prescription pharmaceuticals segment as Kalbe will start the development of biosimilar facilities this year. Potential risk on recalled products; maintain HOLD Kalbe recently recalled two products (all batches of Buvanest Spinal 0.5% and 2 batches of Generic Tranexamic Acid 500mg) due to a quality control issue. Despite its small contribution to total revenues (less than 1% of prescription pharmaceutical sales), we are still awaiting clarity on this issue to ascertain the impact on the company. The investigation is currently being undertaken by the food and drugs monitoring agency (BPOM), and an announcement is expected in around 1-2 weeks. There is no adverse impact on the other pharmacy products or other business unit activities thus far. Following the announcement of the indicative results, we are now reviewing our numbers to reflect the current conditions and await clarity on the products recall. Maintain HOLD for the time being. Armando Marulitua (62-21) 2955 5817 armandom@danareksa.com Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg. www.danareksa.com Sales (IDR bn) 13,636 16,002 17,821 20,469 23,699 EBITDA (IDR bn) 2,437 2,804 3,122 3,600 4,201 EBITDA growth (%) 23% 30% 28% 28% 35% Net profit (IDR bn) 1,734 1,920 2,104 2,481 2,895 Core profit (IDR bn) 1,708 1,918 2,184 2,508 2,914 EPS (IDR) 37 41 45 53 62 EPS growth (%) 17.0 10.7 9.6 17.9 16.7 Net Gearing (%) Net cash Net cash Net cash Net cash Net cash PER (x) 48.7 44.0 40.1 34.0 29.1 PBV (x) 7.6 7.2 9.2 8.0 6.9 EV/EBITDA (x) 37.5 30.1 27.0 23.4 20.1 Dividend yield (%) 1.1 1.1 1.3 1.2 1.5 See important disclosure on the back of this report

Exhibit 1. Kalbe Farma FY2014 indicative result (IDR bn) FY13 FY14 chg 3Q14 4Q14 chg 4Q13 chg FY14 % FY y-y, % q-q,% y-y, % Revenue 16,002 17,365 8.5 4,378 4,607 5.2 4,562 1.0 17,821 97.4 COGS 8,323 8,891 6.8 2,260 2,264 0.1 2,454 (7.8) 9,262 96.0 Gross profit 7,679 8,474 10.4 2,119 2,343 10.6 2,108 11.2 8,559 99.0 Opex 5,130 5,713 11.4 1,450 1,579 8.9 1,391 13.5 5,735 99.6 Operating profit 2,549 2,754 8.0 669 757 13.2 717 5.6 2,825 97.5 Pretax profit 2,573 2,753 7.0 663 765 15.4 759 0.8 2,701 101.9 Net profit 1,920 2,051 6.9 494 564 14.3 553 2.0 2,104 97.5 Margin (%) Gross margin 48.0 48.8 0.8 48.4 50.9 2.5 46.2 4.7 48.0 Operating margin 15.9 15.9 (0.1) 15.3 16.4 1.2 15.7 0.7 15.9 Net margin 12.0 11.8 (0.2) 11.3 12.2 1.0 12.1 0.1 11.8 Opex to sales 32.1 32.9 0.8 33.1 34.3 1.2 30.5 3.8 32.2 Segment analysis FY13 FY14 chg 3Q14 4Q14 chg 4Q13 chg FY14 % FY y-y, % q-q,% % Pharmaceutical 3,869 4,329 11.9 1,075 1,128 4.9 999 12.9 4,327 100.1 Nutrition 3,792 4,581 20.8 1,177 1,256 6.7 1,083 15.9 4,581 100.0 Consumer Health 2,505 2,924 16.7 756 749 (0.9) 623 20.3 2,916 100.3 Distribution 5,836 5,531 (5.2) 1,370 1,474 7.6 1,858 (20.7) 5,998 92.2 Source: Company, Danareksa Sekuritas Inline results overall despite a weak distribution segment Kalbe reported consolidated sales of IDR17.4tn in 2014, or up 8.5% y-y from IDR16tn in 2013 - inline with our expectations. The solid growth reflects strong performance in the prescription pharmaceuticals, nutritionals, and consumer health segments, which grew 11.9%, 20.8%, and 16.7%, respectively. By contrast, the distribution segment continued to underperform, recording negative y-y sales growth of 5.2%, stemming from the weak performance of third party principals products. Operating profits, meanwhile, grew by 8% to IDR2.8tn, slightly lower than the topline growth, mainly due to higher opex, as the opex to sales ratio climbed 84bps to 32.9%. At the bottom line, net profits reached IDR2.1tn, up 6.9% - inline with our expectations. The gross margin improved amidst a lower contribution from the distribution segment The revenues contribution from the distribution segment has fallen to 31.9% of consolidated revenues its lowest level in the past 5 years. This is beneficial for Kalbe s overall gross margin, however, as the margin of the distribution segment is lower than the margins in the other segments. As such, Kalbe s gross margin improved 80bps to 48.8% in 2014 from 48% in 2013 despite the weak rupiah. Meanwhile, despite a higher opex to sales ratio, the company managed to keep its operating margin stable at 15.9%. At the bottom line, the net margin was slightly lower at 11.8% (vs 12% in 2013) due to higher interest expenses. 2

Exhibit 2. Sales figures and margin comparison Net Sales (IDR bn) Gross Profit Margin Operating Profit Margin 31 Dec 2013 (Audited) 31 Dec 2014 (Unaudited) 8.5% 17,365 16,002 48% 49% 11.9% 3,869 4,329 16.7% 2,505 2,924 20.8% 4,581 3,792-5.2% 5,836 5,531 16% 16% Prescription Pharmaceuticals Consumer Health Nutritionals Distribution & Logistics Consolidation 31 Dec 2013 (Audited) 31 Dec 2014 (Unaudited) Source: Company Exhibit 3. Segment contribution Prescription Nutrition Consumer Health Distribution 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 36% 35% 38% 36% 32% 17% 17% 16% 16% 17% 22% 22% 22% 24% 26% 25% 25% 24% 24% 25% 2010 2011 2012 2013 2014 Source: Company 2015 outlook: the management takes a conservative view The management conservatively targets sales growth of 11%-13% in 2015 - similar to the estimates in last year s revised outlook. No detailed sales growth targets by segment have been provided, but the company has provided guidance of moderate sales growth in each segment (low-teens in prescription, mid-teens in consumer health, high teens in nutritionals and flat growth in distribution). The operating profits margin is expected to reach 16%-17%, while EPS growth is expected to reach 14-16%. In 2015, the nutritionals segment will get additional production capacity from the operation of the new liquid milk facility in Sukabumi, which is expected to start operation in the middle of this year, in addition to the ongoing operation of the new skimmed milk facility in Cikampek. In view of this development, we believe the nutritionals segment will continue to perform well this year. However, the distribution segment will continue to struggle this year due to: 1) the impact of contract termination of one of its third party principals; 2) the decision of its principal to limit product distribution territory; and 3) the company s decision to withdraw from medical device distribution in the government tender business due to the low margins. 3

This year, the company has earmarked capex of IDR1-1.3tn. From the total capex, 50% is allocated to the prescription pharmaceuticals segment as Kalbe will start the development of biosimilar facilities this year. Potential risk on recalled products; maintain HOLD Kalbe recently recalled two products (all batches of Buvanest Spinal 0.5% and 2 batches of Generic Tranexamic Acid 500mg) due to a quality control issue. It has also been reported that the food and drugs monitoring agency (BPOM) suspended all sales of these two products until the issue is resolved. The company has yet to provide an explanation regarding this matter as the investigation undertaken by BPOM is still ongoing. The investigation is expected to take around 1-2 weeks (could be longer). Prior to completion of the investigation, the company has refused to comment on the matter. Nonetheless, the contribution of the recalled products to total pharmacy revenues is small - less than 1%. Thus far, there has been no adverse impact on other pharmacy products or other business unit activities. Following the announcement of the indicative results and the latest management guidance for 2015, we are now reviewing our numbers to reflect the current conditions and await clarity on the products recall. Maintain HOLD for the time being. 4

Exhibit 4. Profit and loss (IDR bn) 2012 2013F 2014F 2015F 2016F Revenues 13,636 16,002 17,821 20,469 23,699 Gross profit 6,533 7,679 8,559 9,840 11,424 Operating Profit 2,218 2,549 2,825 3,242 3,770 EBITDA 2,437 2,804 3,122 3,600 4,201 Net interest 57 22 (24) (26) (34) Forex gain (loss) 20 1 (85) (19) (9) Net other 13 1 (14) (14) (14) Pretax income 2,308 2,573 2,701 3,183 3,713 Income tax (533) (602) (540) (637) (743) Others - - - - - Minority Interest (41) (51) (57) (65) (75) Net profit 1,734 1,920 2,104 2,481 2,895 Core profit 1,708 1,918 2,184 2,508 2,914 Source: Company and Danareksa Sekuritas Exhibit 5. Balance Sheet (IDR bn) Current assets 6,442 7,497 8,006 9,041 10,141 Cash & ST investment 2,099 1,614 1,406 1,461 1,387 Account Receivable 1,805 2,145 2,426 2,786 3,226 Inventories 2,115 3,053 3,422 3,927 4,535 Others 422 684 753 867 994 LT Investment 49 42 42 42 42 Fixed Asset - net 2,255 2,926 3,655 4,479 5,409 Goodwill 341 385 385 385 385 Others 331 465 519 587 666 Total assets 9,418 11,315 12,608 14,534 16,643 Current liabilities 1,892 2,641 2,829 3,260 3,639 Accounts payable 809 1,152 1,251 1,436 1,658 ST borrowings 234 608 590 687 686 Others 849 881 988 1,137 1,295 Long-term liabilities 155 175 175 175 175 Long-term debts 0 - - - - Others 155 175 175 175 175 Total liabilities 2,046 2,815 3,003 3,435 3,814 Minority interest 318 392 448 514 589 Share capital 508 469 469 469 469 Excess paid in (32) (34) (34) (34) (34) Retained earnings and others 6,579 7,674 8,722 10,151 11,806 Total equity 7,054 8,108 9,157 10,586 12,240 Total liabilities and equity 9,418 11,315 12,608 14,534 16,643 Source: Company and Danareksa Sekuritas 5

Exhibit 6. Cashflow Statement (IDR bn) Operating cash flow 988 913 1,839 2,129 2,455 Net Profit 1,734 1,920 2,104 2,481 2,895 Depreciation & amortisation 220 258 299 361 434 Change in working capital (692) (1,114) (510) (646) (795) Others (274) (151) (54) (68) (79) Investment cash flow Net capex (614) (929) (1,029) (1,185) (1,363) Cash flow after invt. 373 (16) 810 944 1,092 Financing cash flow (805) (417) (1,018) (889) (1,166) Change in share capital (4) 672 0 0 0 Net change in debt 73 374 (19) 98 (1) Dividend payment (891) (891) (1,056) (1,052) (1,241) Change in other LT liab. 16 (572) 57 65 75 Net cash flow (432) (433) (208) 55 (74) Beginning balance 2,291 1,860 1,426 1,219 1,273 Ending balance 1,860 1,426 1,219 1,273 1,199 Source: Company and Danareksa Sekuritas Exhibit 7. Selected ratios Growth (% yoy) Sales 25.0 17.3 11.4 14.9 15.8 Operating profit 12.7 14.9 10.8 14.8 16.3 EBITDA 12.5 15.1 11.3 15.3 16.7 Net profit 17.0 10.7 9.6 17.9 16.7 Core profit 11.5 12.3 13.8 14.8 16.2 Profitability (%) Gross margin 47.9 48.0 48.0 48.1 48.2 Operating margin 16.3 15.9 15.9 15.8 15.9 EBITDA margin 17.9 17.5 17.5 17.6 17.7 Net profit margin 12.7 12.0 11.8 12.1 12.2 ROE 24.6 23.7 23.0 23.4 23.7 ROA 18.4 17.0 16.7 17.1 17.4 Leverage Net debt/equity (%) Net cash Net cash Net cash Net cash Net cash EBITDA/gross interest (x) 139.1 97.9 64.2 70.4 72.8 Per share data (IDR) EPS 37 41 45 53 62 CFPS 19 19 39 45 52 BVPS 139 173 195 226 261 DPS 19 19 23 22 26 Source: Company, Danareksa Sekuritas 6

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