Robust Outlook For CSL

This story features CSL LIMITED. For more info SHARE ANALYSIS: CSL

CSL sustained strong growth in multiple divisions in FY18 and is expected to realise benefits from an increased number of plasma collection centres in FY19.

-Is momentum slowing at Behring?
-Earnings growth supported by fundamentals
-Is valuation stretched?
 

By Eva Brocklehurst

The Behring plasma business and flu vaccine Seqirus underpinned CSL's ((CSL)) results in FY18 while strong growth was also evident in specialty products. Brokers observe CSL has moved ahead of the plasma collection curve and is now realising the benefit from a large number of collection centres. If market conditions are buoyant, more years of strong growth are expected.

Seqirus returned to profit on the back of a severe northern hemisphere flu season with sales growth up 15%. Behring, which is around 98% of CSL's profit, recorded gains across the board. Total revenue was US$7.92bn. Other highlights included immunoglobulin, with Hizentra up 12%. Specialty products grew 24%, led by Kcentra and Haegarda. Idelvion exceeded expectations, capturing around 40% share in key countries.

Nevertheless, Ord Minnett is cautious as the share price makes little allowance for any medium-term challenges from the new therapies that are under development by competitors.

Capital expenditure is set to increase, and has more than doubled over the past three years, yet the broker believes the investment can be comfortable accommodated, although it is not without risk given long lead times and the potential for market disruption.

Morgans is encouraged by the momentum at Behring, but a slowing exit rate from the second half and lower guidance implies growth will moderate, while Seqirus is expected move back to more normal levels of demand.

The company has a significant first-mover advantage with Haegarda, which has captured around 50% of the prophylactics market since its launch in July and Credit Suisse expects sales to peak in FY19, with a -15% decline in FY20.

Goldman Sachs believes guidance is conservative. The company upgraded guidance twice during FY18 and has ultimately beaten its original targets by 14%. Given current momentum and expectations for margin expansion, Goldman Sachs suspects the market will factor in upside to guidance as the year progresses. The broker, not one of the eight brokers monitored on the FNArena database, has a Buy rating and $231 target.

Margin Expansion

Credit Suisse expects modest margin expansion through the medium term with a shift to higher-margin products, such as Idelvion, Privigen/Hizentra and other specialty products.

The company significantly increased its plasma collection capacity in recent years to meet additional demand. While this investment is heavy over the next few years, Credit Suisse believes CSL will be able to maintain the gains in market share while opening 30-35 plasma collection centres in FY19.

CLSA incorporates the potential for an ongoing uplift in margins in its FY19 forecasts, expecting around 80 basis points of expansion. Sales of higher margin specialty products appear to be growing at more than twice the rate of base products. Additionally, CLSA suspects the current level of cost control can continue.

As the new plasma collection centres mature utilisation should also improve. The broker, not one of the eight monitored daily on the FNArena database, has an Outperform rating and $234.40 target.

Valuation

Guidance is reasonable, Morgan Stanley believes, and the heavy lifting will be done by plasma, while there is no evidence of a slowing in immunoglobulin growth, yet the valuation does not reflect potential risks such as the cyclical element of immunoglobulin or the risk from competitive products.

The company continues to invest in its supply chain as well as R&D and its earnings growth profile is both attractive and supported by fundamentals, Macquarie suggests. Moreover, CSL is well-positioned to meet immunoglobulin demand, given the number of centres rolled out over the past five years, and this should provide a competitive advantage relative to peers.

Investment in the supply chain supports longer-term volume growth as well as a favourable shift in mix that supports the expanding margin and late stage clinical programs, such as CSL 112 and Transplant, provide potential upside to valuation. The multiples are elevated relative to historical averages but this does not detract from an Outperform rating for Macquarie.

Citi downgrades to Neutral from Buy on valuation. The broker notes the stock is trading at a 31% premium over its three-year average PE. Nevertheless, investments in R&D should allow the business to maintain its may market leading position.

The market is anticipating a significant slowdown in revenue in specialty products from FY20, because of competition in Berinert/Haegarda, but should the phase III trial of Berinert use in transplant patients prove successful, sales could grow beyond FY20. There appears to Citi to be little emphasis on this aspect in the market, although more work is required to assess the opportunity.

Based on the recent relative share price performance UBS also downgrades to Neutral from Buy. The broker expects plasma product growth will remain robust, based on unmet need. Idelvion should also contribute materially. FNArena's database has two Buy ratings and six Hold. The consensus target is $213.64, steady with the last share price. This compares with $192.38 ahead of the results.

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