Kalbe Farma (KLBF IJ)

Persisting headwind in FY24 from shifting industry trend

We are turning more cautious on KLBF’s FY23-25F EPS growth as we see threat for its branded prescription drugs from the persisting rising trend of hospital patients visits from JKN patients in 9M23 (17% CAGR in 2014-22). Against this headwind, we project a lower FY24F earnings growth of 2.9% yoy (21-27% cut in FY23-25F est.) and cut our rating to HOLD with a lower TP of IDR1,600.

Rising trend of JKN patients poses threat to KLBF’s prescription drugs. Hospital operators MIKA, HEAL and SILO have reported further increase in revenue portion from JKN patients in 9M23, continuing the trend from the past few years (data shown by National Health Program/ BPJS that showed 17% CAGR in 2014-22 (34% in FY22) increase in total number of visits by JKN patients to healthcare facilities. As this trend appears to persist in 9M23, we see a risk for strong demand growth for generic products to also continue in 2024 onward.

Expect generic drugs to be main driver of FY24 top line growth for prescription segment. We expect KLBF’s FY24 growth to hinge on organic growth in its prescription drugs segment, with new oncology/biosimilar products to gradually provide a higher contribution (9M23: 10% of prescriptions/ 2.6% to 9M23 revenues). We forecast 8.9% FY24 revenue growth for the prescription segment (lower than FY23 of 29% yoy including Sanofi), but with generic drugs expected to be the main driver with +17.3% yoy. With higher sales from generic drugs, we forecast margin to contract (FY24F: 47% vs FY23F’s 47.9%).

Headwind for consumers segment from soft purchasing power. Amid soft purchasing power and a growing trend of higher spending toward lifestyle, we project sales of Consumer Health and Nutritional products to remain tepid at 4-5% yoy in FY24 and forecast continued low FY24F gross margins of 38.7%. In overall, we project 5.8% yoy revenue growth. We expect KLBF to maintain its FY24F opex/revenues at 27.2% and as such, expect 2.9% yoy earnings growth.

Downgrade rating to HOLD on challenging outlook. KLBF currently trades at 27.7x FY24F PE, with an unexciting growth outlook of 2.9%. We lowered our DCF-based TP to IDR1,600 (WACC 7.9%, Terminal growth 4%) to reflect our revised forecast and roll over our valuation to 2024, implying FY24F PE of 26.8x (in-line with 5-year avg. PE of 26.6x). Upside risk is a quick rebound in Branded prescription/Nutrition/OTC leading to higher margin and stronger sales (upside risk), while downside risk will be from higher-than-expected generic contribution that will put pressure on margin.

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