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The highlight of CSL’s profit result last week was the use of the word “strong”. Discussing the outlook for FY23 and beyond, CSL’s Managing Director Paul Perreault said: “CSL is returning to strong sustainable growth” and “Strong mid-term outlook as Covid recedes”. For a company used to under-promising and over-delivering, these were “strong” words.
And so it was somewhat surprising to see the market’s reaction immediately following the announcement on Wednesday, which knocked 5% off CSL’s share price. By Thursday, it had fully recovered and was up a couple of per cent, testing $300 again, before pulling back on Friday to end the week at $294.67.
CLS’s reported profit of US$2,236 million was down 6% in constant currency terms on FY21, but near the top of earlier company guidance in the range of US$2,150 million to US$2,250 million.
Revenue was up 3% largely due to the outstanding performance of CSL Seqirus (the influenza vaccines business), where revenue rose by 13%. In the larger CSL Behring business, which is immunoglobulins and albumin (from blood plasma), haemophilia and other specialty products, revenue rose by 2%. Higher blood plasma collection costs, plus constrained collections due to the impact of Covid, led to the fall in NPAT. Behring’s gross profit margin fell from 56.5% to 53.3%.
Plasma, which is sourced through collection centres in the major cities (mainly in the US), is now back at pre-pandemic levels. During the pandemic, many donors elected to remain at home. CSL was also required to take additional precautions for the safety of donors. With about a nine-month lead time between the collection of the blood plasma and product sale, this is a key driver of future revenue (and profitability). CSL opened 27 plasma collection centres in FY22 and is investing in a new plasmaphereses platform, which will deliver a 30% improvement in collection times.
Two key products not dependent on blood plasma, IDELVION (which is a recombinant haemophilia B product), and KCENTRA (used for peri-operative bleeding), grew sales by 20% and 18% respectively. The latter as hospital demand returned to pre-pandemic levels.
Looking ahead, CSL guided to the following:
Importantly, this guidance does not include any contribution from Vifor Pharma (now known as CSL Vifor), with the acquisition completed on 9 August. CSL Vifor is a global leader in iron deficiency and therapies for the treatment of diseases that impact the kidney. CSL will update Group guidance at the first practicable opportunity to include the expected contribution from CSL Vifor.
The brokers are moderately bullish on CSL. Of the six major brokers covered by FNArena, five have “buy” recommendations and the sixth has a “neutral”. Target prices are higher, in a relatively narrow range from $305.00 (Credit Suisse) through to a high of $340.00 from Citi. The consensus is $324.80, 10.2% higher than Friday’s ASX close of $294.67.
Morgan Stanley’s commentary (precis) summarises the general feel: “Morgan Stanley lifts its target to CSL to $323 following the results, and notes improving collection volumes. However, FY23 guidance was lower than the market had expected and collection costs remain elevated. A gradual recovery in margin is expected, rather than V-shaped”.
On multiples of forecast earnings, the brokers have CSL trading on a (consensus) multiple of 36.8x forecast FY23 earnings (using current exchange rates) and 29.9x forecast FY24 earnings.
The main criticism of CSL is that the multiple is too high and globally, there are healthcare stocks that offer better value. But you pay a premium for quality and market leadership, and CSL is the global leader in blood plasma products, number two globally in influenza vaccines and will become the global leader in the provision of treatments for chronic kidney disease (through CSL Vifor).
Maybe it is a case of “home-town bias” (although 90% of the revenues are generated outside Australia), CSL is so big in the index that Australian institutions have to own it. Further, it is not “materials” and it’s not “banks” – and it is growing! Being underweight is a “risky” position for a fund manager.
Wednesday’s price action showed that institutions will “buy the dip”. Cracking $300 is proving to be a bit of a stumbling block, but my sense is that CSL will get there. It’s just a matter of time. A core stock for an investor’s portfolio with a minimum weighting of 5%. Good buying now.
All prices and analysis at 22 August 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.