FY22: Best year yet. 4Q was again the best quarter for KLBF in terms of sales, with quarterly sales growth of +6.1% QoQ (+8.2% YoY) in 4Q22, which helped bring its full-year revenue to IDR 28.9 trillion (+10.2% YoY), its best in history. All KLBF’s business segments saw revenue growth, especially the distribution segment (main business segment, 37.3% of KLBF sales) (+10.8% YoY), supported by the company’s digital strategies (EMOS and Mostrans). KLBF’s prescription drugs went up +7.5% YoY, healthcare products sales rose +14.6% YoY, and nutrition products sales rose +9.3% YoY. By region, KLBF’s domestic sales rose +8.9% YoY, and export sales went up +35.5% YoY. It should be noted that exports contributed 5.8% of KLBF's consolidated revenue in FY22 (FY21: 4.8%).

Margin challenges. KLBF's GPM faced all sorts of challenges in FY22, including (1) raw material surges, (2) changes in revenue mix (higher contribution of more affordable products), and (3) an increase in the contribution of distribution segment, which has the lowest GPM among KLBF’s business segments (22.5%, average: 51.8%). All KLBF business segments posted lower GPM than the previous year, pushing down KLBF's consolidated FY22 GPM to 40.5% (-252bps YoY). Nonetheless, KLBF's gross profit still went up +3.7% YoY, in line with the increase in its sales volume. Meanwhile, its NPM remained relatively stable at 11.7% (-43bps YoY), partly due to the decline in opex/sales ratio to 25.8% (FY21: 27.7%). We expect KLBF's GPM to face more challenges from its revenue mix this year (FY23F), though its gross profit will continue to grow as sales volume improves further.

FY23F outlook. We project KLBF to experience another solid year in FY23F, with revenue of IDR 32.7 trillion (+13.1% YoY), in line with the company's target (13-15% YoY), which includes the contribution of the recently acquired Sanofi (projected contribution: 3-4%). The acquisition is expected to boost KLBF’s market share in the pharmaceutical industry, particularly in cardiovascular drugs, diabetes treatment, and vaccines. In addition, there are several positive catalysts that we think can help drive KLBF's future performance, including (1) the establishment of a JV with Synergy Investment in Shenzhen, China, which can help KLBF secure raw materials, (2) product innovations, especially biological drugs that have higher GPM, (3) the company’s synergy with SMDR, and (4) its JV with Ecossential Foods Corp, to improve KLBF’s product distribution in the Philippines. On its bottom line, we forecast KLBF to book net profit growth of +10.5% YoY in FY23F. To help achieve its target, KLBF has prepared a Capex budget of IDR 1 trillion for FY23F, which will primarily be used to increase production capacity and expand distribution channels.

BUY, TP IDR 2,400. In light of the factors mentioned above, as well as its solid balance sheet, we reiterate our BUY rating on KLBF with a TP of IDR 2,400 (30.1x FY23F PE).