Is CSL’s Outlook Too Conservative?

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Brokers appear confident CSL could beat guidance in FY18, thanks to a maiden profit from its flu vaccine, Seqirus. The core business is also expected to be strong.

-Likely lift in flu vaccine demand given severe US flu season
-Strong growth expected in specialty product revenue and margin
-Rising plasma centre and R&D costs may rein in expectations for margin expansion
 

By Eva Brocklehurst

CSL ((CSL)) is on the cusp of breaking even with its Seqirus vaccine and an early US flu season suggests FY18 guidance could be conservative. First half revenue was ahead of most broker expectations, driven by better gross margins that reflected product and geographic mix along with subdued costs.

The company has provided upgraded net profit guidance for FY18 of US$1.55-1.6bn. Ord Minnett is confident the company will beat guidance in the full year thanks to a maiden profit from Seqirus and momentum in plasma product sales, especially the higher margin specialty and haemophilia therapies.

The broker expects this to be achieved despite a material lift in costs in the second half, which appear partly driven by management, as it seeks to take advantage of another strong result.

Morgans agrees Seqirus can surpass breaking even this year but remains cautious regarding the seasonality, R&D phasing and other significant re-investments that may limit strong second half gains.

The broker considers guidance realistic rather than conservative. The stock is a core holding yet, given there is less than 10% in total shareholder returns, Morgans downgrades to Hold from Add.

Guidance appears conservative to CLSA because of the potential for margin uplift in Behring, as sales of higher margin specialty products are growing twice as fast as a base products. CLSA, not one of the eight stockbrokers monitored daily on the FNArena database, has an Outperform rating on the stock with a $164.75 target.

Seqirus

Claims of a vaccine shortage have been denied by the company, while demand for vaccine is likely to lift as a predictable response to the worst flu season in years. This should reduce returns of vaccine and boost flu earnings.

Management expects Seqirus to break even but many brokers suspect that this outlook is conservative. The second half is usually weak, from seasonality, and there is always potential for a large number of vaccine returns.

This may be the case in a normal flu season, where Credit Suisse estimates 5-10% of volumes are returned, but this percentage should be much reduced this time around, given the severity of the current US flu season.

CLSA points out around 70% of Seqirus revenue is generated in the US and so rebate losses are likely to be much lower. The broker calculates EBITDA for Seqirus of US$83m in FY18, ahead of guidance.

UBS notes CSL's track record for under promising and over delivering, despite the company contending that lumpy expenditure and the volatility of second half Seqirus losses make guidance a realistic target.

Behring

Morgan Stanley estimates that strong results from the company's core business, Behring, will provide the bottom of the new guidance range and Seqirus will take it over the top.

Idelvion is on track to annualise around US$150-180m in revenue in FY18, yet Morgan Stanley envisages mixed fortunes in this segment, with the loss of the low-margin Helixate sales, challenges for Afstyla and ongoing declines in the pdFVIII franchise in the second half.

Citi expects higher profitability at both Behring and Seqirus. The broker likes the stock because of the attractiveness of the plasma industry. Strong growth is expected in immunoglobulins because of label expansions.

Specialty products revenue and margins should be supported by the continued ramp up of Haegarda, as patients transition from legacy IV therapies, amid further market penetration of Kcentra. Idelvion is likely to be the preferred treatment in haemophilia and gain significant market share as well, at least until FY20, in Citi's view.

Relative to its peers, CSL has significantly increased plasma collection capacity and can meet additional demand requirements and gain share, Credit Suisse asserts. Gains are expected to be maintained in the short to medium term, although there will be heavy capital expenditure required over the next few years to ensure supply growth keeps pace with demand.

Macquarie also points out the plasma collection centre network has a competitive advantage relative to peers and should allow the company to meet robust demand for immunoglobulin, as well as increased volumes from expanded indications.

Albumin was the weakest point of the result, UBS notes, with global sales moderating to growth of 4%. The company acknowledges heightened competition in this area in the US.

On the other hand UBS found immunoglobulin growth particularly impressive, considering the comparables in the prior corresponding half where there was significant supply disruption for key competitors.

Costs

Morgan Stanley believes costs growth is less well understood by the market, versus the potential of new product launches. Rising plasma collection costs, an increase in R&D as well as a large step-up in capital expenditure may rein in some expectations for margin expansion, in the broker's opinion.

FNArena's database shows four Buy ratings and three Hold. The consensus target is $159.86, suggesting 6.3% upside to the last share price. This compares with $150.34 ahead of the results. Targets range from $142 (Morgan Stanley) to $175 (Citi).

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