CSL Demonstrates Confidence Despite Competition

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

-Guides to 15% FY15 earnings growth
-Little room for disappointment
-Hizentra driving Ig portfolio
-Renewed buy-back
 

By Eva Brocklehurst

Blood plasma and vaccine supplier CSL ((CSL)) delivered strong growth in specialty products in FY14, foreshadowing another buy-back of up to $950m later in the year. Guidance  for 15% growth in FY15 underscores the strength of the business and serves to douse growing concerns regarding the company's ability to withstand competitive pressures. Or does it?

CSL reported profit growth of 11%. CSL Behring divisional revenue grew 10%, a surprise to many brokers. Macquarie considers this result should put to rest fears of a slowdown. In the lead up to the result there were mounting concerns about a return of competitors to the market and pricing pressure for Immunoglobulin (Ig). Weak results from European competitors furthered fears regarding CSL's ability to continue with its growth trajectory. Macquarie hails the results as a sign many of these concerns are difficult to justify. With the stock trading at a 12% premium to the market versus its longer term average of 36%, Macquarie considers it increasingly attractive.

JP Morgan also believes CSL has silenced the sceptics. Sales accelerated in the second half largely from lumpy contracts but still highlighted strength in Ig and albumin. Earnings guidance reflects underlying growth of 11%, adjusting for US antitrust class actions. This is a strong signal, in JP Morgan's view, considering guidance incorporates expectations regarding Baxter's HyQvia launch in the US. Gearing appears to be 1-2 years off the target and this suggests the buy-back may be scaled back, although JP Morgan suspects an upward revision of the target gearing is more likely.

FNArena's database contains five Buy ratings. There are two Hold ratings. These are CIMB and Deutsche Bank, yet to report. Citi is the lone Sell rating.

Citi found CSL Behring revenue gains as positive but was disappointed with the divisional margin, down a surprising 40 basis points. The broker considers the FY15 outlook is reasonable but cannot easily dismiss competitive pressures. On this front, Citi notes the launch of Octagam 10% in the US, the launch of HyQvia and improving supply from Baxter. Haemophilia competitors are Eloctate and Alprolix, and there are a range of other coagulation products. The broker expects FY16 growth of just 4% to account for these pressures. On a 12-month forward price:earnings estimate of 22 times the broker considers the stock expensive, given the forecast trajectory. There is little room for disappointment in Citi's opinion. Hence, the Sell rating.

Hizentra appears to be a significant driver of the Ig portfolio. Competitor product HyQvia poses a threat in the short term but the potential use of Hizentra in Chronic Inflammatory Demyelinating Polyneuropathy (CIDP) presents a more material opportunity over the medium term, in Credit Suisse's opinion. While Chinese consumption of albumin shows no signs of slowing the broker does expect growth to temper over time.

The company has enjoyed several years of superb growth. Tailwinds may be abating but BA-Merrill Lynch considers growth remains strong enough, reflecting the company's resilience irrespective of market conditions and competitive pressure. The breadth of geographical and product reach serves CSL well and creates a stock worthy, on a risk-adjusted trajectory, of a Buy call, in the broker's view. Expanding margins remain intact and, given the second half growth was mostly volume driven, Merrills is confident the company will leverage this into FY15.

The company's track record stood the test again and UBS remains confident the new CEO can continue to deliver. The renewed buy-back adds 1.2% to the broker's FY15 earnings per share forecasts. UBS continues to rate CSL as a core portfolio holding. The company will submit its long-acting rFIX for regulatory approval in coming months and while the company does not expect a contribution in FY15, UBS notes the product portfolio canvases a US9bn market. Moreover, with gross margins over 75% the products carry potential for material earnings upside.

On FNArena's database the consensus target is $74.82, suggesting 7.3% upside to the last share price. This compares with $72.95 ahead of the results. Targets range from $62.86 (Citi) to $83.00 (Macquarie).
 

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