Bareksa.com - We maintain our SELL recommendation on KLBF with target price of Rp1,050. FY2013 performance is not encouraging, our profit forecast 2014F/15F is lowered insignificantly. We lower the target margin 2014F/15F, but still above the margin FY2013. Our assumption of profit margins is that it would be improved by commercial operation (3Q 2013) oncology production facilities and an increase in export sales became a major factor of KLBF's rising profit margins. Currently KLBF is traded at a P/E level of 28.2x/23.4x in 2014F/15F.

KLBF net profit in 2013 grew 11% YoY to Rp1.9 billion. These results reach 93%/97% of our target/consensus. KLBF net margin in 2013 fell by 71 bps to 12% due to the impact of foreign exchange translation. Previous management targets 2013 profit growth of 15-18%.

KLBF sales in 2013 grew 17.4% YoY to Rp16 trillion. This growth is lower than the growth in 2012 reached 25%. These results reflect 102%/100% of our target/consensus. The largest contribution comes from nutrition segment grew by 26% and the prescription drugs segment grew by 18%.

In 2014, KLBF management is targeting sales growth of 14-16% and net profit growth of 15-17%. This year's target is the same as in 2013. 2014 capital spending is targeted Rp1-1,2 trillion and the DPR this year will be dropped to a minimum 40% from 50% before.

KLBF business has been transformed, from a company that focuses on medicinal products into a company with innovative healthcare products. In the last 10 years the contribution of non-drugs increased from 12% to 60%. Therefore, to be more precise, KLBF should be categorized into the food and beverage sector.

Sources: Buana Research

Sources: Buana Research

KLBF sales in 2013 grew 17.4% YoY to Rp16 trillion. This growth is lower than the growth in 2012 reached 25%. These results reflect 102%/100% of our target/consensus. The largest contribution comes from nutrition segment grew by 26% and the prescription drugs segment grew by 18%.

Sources: Buana Research

KLBF is able to maintain gross margins in 2013 to 47.9% at the same level as last year. In 2013 KLBF do as much as 3 times the price adjustment to address the effects of fuel price increase and minimum wage to the cost of production.

Sources: Buana Research

In the future we believe KLBF margin will increase. This is based on the operation of oncology plant in 3Q 2014 and increased export sales. Oncology products have a higher margin of 5-10% compared to branded products of KLBF.

Our profit forecast has not changed significantly (-4%), We lower the target margin 2014F/15F, but still above the margin FY2013 . We estimate the additional margin will come from product oncology (start commercial in 3Q2013), and growing portion of export.

Sources: Buana Research

Sources: Buana Research

KLBF portion of export sales will continue to rise. KLBF is quite active in opening new export markets, in addition to the oncology products potential in the ASEAN market and strategic opportunities to increase the share of exports. Export sales have higher margins than domestic. This is why the increase in the portion of export sales will increase KLBF margin.

*Marolop A. Nainggolan is Head of Research of PT Buana Capital. This article is part of the Equity Research of PT Buana Capital