Investing in Indonesian Pharmaceutical Companies in the

Middle of Pandemic Uncertainty – Case Study of PT Jamu dan

Farmasi Sido Muncul
Mas Zuchrizal Rasyidian Winata a, Dr. Sylviana Maya Damayanti, CFP b
abInstitut Teknologi Bandung, Bandung, Indonesia
Corresponding email: mas.zuchrizal@sbm-itb.ac.id

Abstract

Against the vast challenges of Indonesia’s development amidst the COVID-19

pandemic, Indonesia stock market tumbled well below 3900 in March; the lowest in
the past five years. For an example, one of the Pharmaceutical companies, PT Jamu
dan Farmasi Sido Muncul managed to capture an increased net income of 10%
compared to its previous quarter. Still, Sido Muncul’s stock valuation managed to
drop to 940 rupiah per share before bounced back to 1200 rupiah per share.
However, after the emerging news about the production of COVID-19 vaccines,
several other pharmaceutical companies’ market price flew by over 100% since its
lowest point in march; yet Sido Muncul’s stock value still remains in around 1200
rupiah per share. The purpose for the present research is to examine the value driver
of the stock price and determine the projected valuation of PT Jamu dan Farmasi
Sido Muncul by using financial ratio analysis, absolute, and relative valuation
method. Based on the conducted research, PT Jamu dan Farmasi Sido Muncul does
not have any short-term debt, and its gross profit margin is at 55%. Using discounted
cash flow, PT Jamu dan Farmasi Sido Muncul’s market price are projected at 1,394
rupiah per share, or about 45% above its lowest price on March 2020. The analysis
suggests that the market fluctuation of market price of pharmaceutical companies,
and that of PT Jamu dan Farmasi Sido Muncul are caused by the market sentiment
and does not reflect the fundamental aspect of the company.

Keywords: Discounted cash flow, stock valuation, stock market, financial ratios

Introduction
As the stock market tumbled due to COVID-19 pandemic, the Indonesian Stock Index (JKSE)
managed to reach 3900 in 24 March 2020. It is the market’s lowest in the past five years. Later
on, Bank Indonesia (BI) forecasted that the country will face recession as soon as the third
quarter of 2020 (Bank Indonesia, 2019), while International Monetary Fund had also forecasted
that Indonesia would see a decrease of GDP by -0.5 percent (International Monetary Fund,
2020). Along with the ever-increasing positive cases of COVID-19 around the world, Indonesian
Stock Index struggled to return to its pre-pandemic index price. Numerous publicly-listed
companies found itself priced below its book value that could attract value investors especially
companies with economic moat which have better performance for long term investments that
could lead to better long-term performance (Dorsey, 2011). However, uncertainties that
happened globally made the recovery of the stock index rather slow. This research aims to
analyze whether the fall of stock prices actually reflect on the fundamental of a company, using
PT Industri Jamu dan Farmasi Sido muncul of pharmaceutical industry. The research will be
using the framework of economic moat, which identify whether a company has a durable,
competitive advantage against its competitors to further see if the moat reflects on the stock
price. However, it is necessary to conduct further research on other publicly-listed companies in
order to reach better consensus.

Literature Review
Mary Buffett (2001) stated that Warren Buffett identified several points of finding an excellent
company:

 Makes product that are used up quickly

 Have an appealing and strong brand identity
 Able to persuade consumers buy their products
 Providing decent consumer services or goods that are needed

Should these key features exist in a company, Buffett illustrated that the company had reached a
term “economic moat”, which is a condition where the company has a durable, competitive
advantage over its competitors. Other forces that could enhance a company’s economic moat are
strong brand identity, monopoly status, economies of scale, and the inability of its business
competitors to create substitute or better products (Graham & Zweig, 2006).

In addition, Jay Barney (1995) identified four key requirements of a company’s resources to
secure a competitive advantage over its competitors:

 Valuable
 Rare
 Inimitable
 Organized
The framework of Barney, also known as VRIO framework that to assess the company’s
competitive advantage, its resources should be considered valuable or have something in value
for its customers. If it is considered valuable, the company should find whether its resource is
rare enough or is the company have control over scarce resources. Furthermore, the inimitability
of the resource should also be considered; whether the company possess something that is hard
or expensive for the competitors to duplicate. Lastly, the company should be organized in its
structures, managements, and its supply chains to secure the competitive advantage over its
competitors.

Is the
Are the Are the company
Are those
company ORGANIZED Competitive
resources hard to
resources
IMITATE?
to manage Advantage
VALUABLE? RARE? the
resources?

Temporary Temporary
Competitive Competitive Competitive Competitive
Disadvantage Parity Advantage Advantage
Figure 1: The VRIO Framework. Source: Rothaermel, F., Strategic Management, 2013

Methodology
Internal Analysis of PT Jamu dan Farmasi Sido Muncul
Assessment of several pharmaceutical annual reports and its financial performances are made to
obtain the data about Sido Muncul’s economic moat. According to Sido Muncul’s 2019 annual
report, the company’s largest contributor of its revenue lies on its herbal medicine and
supplements, followed by food and beverages, and OTC medicines.

Table 1: Total Sales of Sido Muncul’s product segments (in billion rupiah)
Segments 2015 sales 2016 sales 2017 sales 2018 sales 2019 sales
Herbal Medicine & 1140 1520 1690 1884 2064
Supplements
Food & Beverages 997 963 795 820 886
OTC Medicines 76 79 89 100 117
Sido Muncul’s sales proportion between herbal medicine & supplements and food & beverages
were 52 to 45 percent respectively in 2015, while in 2019 the proportion of herbal medicine &
supplements grew to 67 percent and food & beverages shrank to 29 percent. Additionally, herbal
medicine & supplements contributed to the company’s gross profit margin at about 65 percent,
which is a distinctively bigger proportion than food & beverages’ gross profit contribution at 34.6
percent. The main source of Sido Muncul’s profitability lies in its herbal medicine segment,
particularly Tolak Angin, which contributed as the market leader in traditional herbal medicine
(jamu) industry in Indonesia.

VRIO Framework
Several conclusions about the company’s value, rarity, inimitability of its resources was made by
obtaining the data from the company’s annual reports and corporate presentations from 2015 to
2019 as well as other external resources. Since the main profit of the company lies in its herbal
medicine segment, author decided to analyze the resources particular to this business segment.
The VRIO framework of Sido Muncul’s herbal medicine segment is as following:

Table 2: VRIO analysis of herbal medicine segment of Sido Muncul

Valuable - Affordable and easily obtainable raw material domestically
- Overall low production cost leading to affordable product price
Rare - Recipe license from the pioneer of packaged jamu product
Inimitable - Market leader in jamu industry (35.6%) and market leader in herbal cold
symptoms product category (70%) by strong brand equity of Tolak Angin.
Organized - Semarang Herbal Indo Plant, manufacturing plant specialized in herbal
medicine products.
- “Tolak Angin II Factory”, a fully automated Tolak Angin manufacturing
plant.

Discounted Cash Flow

Sido Muncul’s Q2 results indicated that the first half sales performance of the company
increased by 3.5% compared to the first half of 2019. Additionally, Sido Muncul’s 5-year
compound annual growth rate (CAGR) of its sales are at 7%. Furthermore, the average GDP
growth of Indonesian pharmaceutical industry for the last 5 years are averaged at 6.16%.
Assuming that the company’s growth remains the same, author forecasted the fair value of the
company using discounted cash flow method which includes other variables such as risk-free
rate of return, company’s beta, and market risk premium. Per 23 July 2020, author estimated
that the target price of PT Jamu dan Farmasi Sido Muncul is at 1,394 rupiah per stock. Complete
DCF calculation can be found in the appendix section.
Competitor Analysis
The financial health of selected pharmaceutical companies is assessed by several financial health
and liquidity ratio. In this research, author decided to compare the annual net profit, net profit
margin, annualized current earnings per share (EPS), annualized P/E ratio, current price to
book value (PBV), quarterly quick ratio, and quarterly debt to equity ratio.

Table 3: Financial health and liquidity ratio of publicly-listed pharmaceutical companies in

Indonesia (per 23 July 2020)
Company EPS P/E Ratio PBV Quick Ratio Debt to Equity Ratio
Sido Muncul 55.18 23.02 6.19 4.2 0
Darya Varia 201.72 11.55 1.94 2.25 0.03
Kimia Farma 18.84 141.70 2.155 0.56 0.99
Kalbe Farma 57.12 28.28 4.61 2.34 0.07
Tempo Scan Pacific 252.52 10.35 1.14 2.1 0.13

The table serves as a comparison of financial and liquidity ratios between several pharmaceutical
companies. Annual earnings per share shows the company profit divided by its outstanding
shares where higher number could mean higher value of the company. Price to earnings ratio are
the calculation of current share price to its earnings per share, and price to book value are the
ratio of a company’s current share price to its book value per share. Lower ratio of P/E and PBV
may attract more investors as it could mean a more affordable share price. Higher quick ratio
means that a company is more able to cover its short-term debt using its current assets
excluding its inventory, while a debt to equity ratio of more than 1 means that the company is
utilizing more debt for their operational needs than its shareholder equity, while 0 means that
the company is not utilizing short-term debt at all.

At the case of Sido Muncul, author analysis suggests that the company is in a good shape
fundamentally. The first half of 2020 financial report stated that the company had 3.5% increase
of sales compared to the first half of previous year, and the company stated that there were no
setbacks of operational activities due to COVID-19 pandemic. Sido Muncul also have no short-
term liabilities, and the company’s current assets could cover four times its overall liabilities.
However, Sido Muncul’s price to earnings ratio and price to book value ratio suggests that the
valuation of the company is already overpriced in the stock market, even though author’s DCF
calculation finds that there might be a chance for Sido Muncul’s market price to increase further.
Market Analysis
The emerging news of step III vaccines that were successfully tested and would soon be available
in Indonesia affected the price movements of stocks belonged to pharmaceutical sectors
significantly. On July 21 2020, three of publicly listed pharmaceutical companies in Indonesia –
Kimia Farma, Phapros, and Indofarma – had their market price surged up to 25%. The price
surge continued and lasted for three days due to the news that the vaccine “Sinovac” will
undergo testing in several areas in Indonesia and might be ready to be distributed on 2021.
However, the sentiment had been found to generate little effect to other pharmaceutical
companies, including Sido Muncul. Author assumed that this is due to the fact that there is no
information whether Sido Muncul will be involved in the production or distribution of the
vaccines.

Table 4: Market prices of publicly-listed pharmaceutical companies at closing hour in a week

after the news of successful COVID-19 vaccine test emerged (in rupiah)
Price Change
Company 20-Jul 21-Jul 22-Jul 23-Jul 24-Jul
20-24 July
Sido Muncul 1210 1240 1245 1270 1235 2%
Darya Varia 2160 2190 2260 2330 2250 4%
Kimia Farma* 1375 1715 2140 2670 2740 99%
Kalbe Farma 1485 1520 1575 1615 1570 6%
Tempo Scan 1370 1395 1395 1460 1405 3%
Indofarma* 1205 1505 1880 2350 2610 117%
Source: Stockbit. Companies with asterisk (*) are related to the news of COVID-19 vaccine “Sinovac”

Conclusions
The purpose of this study was to examine the effect of market sentiments related to COVID-19 to
a pharmaceutical company’s stock price, and its correlation to company’s fundamental using PT
Jamu dan Farmasi Sido Muncul as a case study. The study has found that there is little
connection between a company’s fundamental to its market price during current pandemic
situation. By referring to the VRIO framework, Sido Muncul might have competitive advantage
over its competitors, and author’s DCF valuation suggests that there is possible for Sido
Muncul’s market price to be at around 1,300 to 1,400 rupiah per stock. However, the market
selloff in March plunged Sido Muncul’s price to 970 and the news about vaccine readiness –
which Sido Muncul had not taken any part of – had only little effect on the price movement of
Sido Muncul in the stock market. It is safe to assume that the strongest market mover in
Indonesian stock market during pandemic uncertainty are the news and sentiments both locally
and internationally.

The limitation of this study is that the valuation is only targeted for one company in the
pharmaceutical sector. Moreover, there are other ratios that could be used to measure up a
company’s health. Other valuation methods are also possible but is not included in this study as
well. Other studies for the companies in pharmaceutical sector especially those related to
COVID-19 vaccines and also other sector might contribute to a better insight about the stock
market in Indonesia during the pandemic.
 REFERENCES

[1] Asian Development Bank, 2020. Indonesia: Economy. [Online] Available at:
https://www.adb.org/countries/indonesia/economy [Accessed 20 April 2020].

[2] Bank Indonesia, 2019. Laporan Perekonomian Indonesia, Jakarta: Bank Indonesia.

[3] Barney, J.B., Hesterly, W.S., 2006. Strategic Management and Competitive Advantage: Concepts and
Cases, Pearson / Prentice Hall.

[4] Buffett, M., 2001. Buffettology Workbook: Value Investing The Buffett Way. s.l.:Simon & Schuster.

[5] Rothaermel, F., 2014. Internal Analysis: Resources, Capabilities, and Core Competencies, Strategic
Management. 2nd ed. London: McGraw-Hill, 105

[6] Bank Indonesia, 2019. Laporan Perekonomian Indonesia, Jakarta: Bank Indonesia.

[7] Graham, B. & Zweig, J., 2006. The Intelligent Investor: The Definitive Book on Value Investing.
s.l.:Harper Business.

[8] International Monetary Fund, 2020. World Economic Outlook, April 2020: The Great Lockdown.
[Online] Available at: https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020
[Accessed 29 April 2020]

[9] Sido Muncul, 2019. Sido Muncul Annual Report 2019. Semarang: PT Industri Jamu dan Farmasi Sido
Muncul Tbk.

APPENDIXES
Appendix 1: Net profit margin comparison of selected pharmaceutical companies in Indonesia.
30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
2015 2016 2017 2018 2019

Sido Muncul Kimia Farma Kalbe Farma

Tempo Scan Pacific Darya Varia Laboratioria
 Appendix 2: Fair value and target price of PT Industri Jamu dan Farmasi Sido Muncul.
Enterprise Value 20,089,116 ST Debt 0
Net Debt (822,021) LT Debt 42,803
Fair Value (million rupiah) 20,911,137 Cash (million rupiah) 864,824
Outstanding Shares (million unit) 15,000 Net Debt (million rupiah) (822,021)
       
Target Price 1,394 % Change 12.88%
Current Price (24 July 2020) 1,235

Appendix 3: Forecasted enterprise value of PT Industri Jamu dan Farmasi Sido Muncul.
Sido Muncul 2020f 2021f 2022f 2023f 2024f TV
Valuation
(in million rupiah)            
DCF 1 2 3 4 5
EBIT  
1,174,457 1,335,973 1,508,934 1,694,110 1,892,325
Less (-) Tax  
304,185 343,421 385,544 430,740 479,210
NOPAT  
870,272 992,552 1,123,390 1,263,370 1,413,115
Add (+) Depreciation  
47,191 50,541 54,226 58,279 62,738
Less (-) Changes in  
NWC 119,625 157,541 178,506 187,034 193,647
Less (-) Capex  
152,269 167,495 184,245 202,670 222,936
FCFF
645,569 718,056 814,865 931,946 1,059,269 27,689,553
Discount Factor
0.907 0.823 0.747 0.678 0.615 1
Par Value
585,703 591,055 608,542 631,438 651,150 17,021,228
Enterprise Value 20,089,116