Australia | Jan 19 2015
-Full impact of CHF surge may take time
-Cost base still advantageous
-Management remains confident about increased competition
By Eva Brocklehurst
Action by the Swiss National Bank to remove its currency peg to the euro has caused several brokers to re-evaluate their models for CSL ((CSL)). The SNB has removed the cap on CHF/EUR that was introduced in September 2011 to prevent an overvaluing of the Swiss franc. CSL's main manufacturing plant is based in Bern and its accounts are US dollar denominated. The SNB also reduced its interest rates by 50 basis points to alleviate the expected upside pressure on the Swiss franc, which brokers observe did nothing to stem an overnight surge.
CSL reports in US dollars but its largest revenue FX exposure is in euro, while the Swiss franc is its largest FX exposure in terms of costs. Hence, Macquarie notes the peg to the euro was a useful hedge for the company because, up until the SNB's recent move, CSL had little exposure to a falling euro versus the US dollar.
Macquarie suspects the impact will not be felt until FY16, with production of plasma products taking a number of months from when the raw plasma is first collected. CSL obtained its significant manufacturing presence in Switzerland after acquiring ZLB from the Swiss Red Cross in 2000. Acknowledging the importance of the Swiss franc as a cost currency, Macquarie also suspects the impact of the changes may be overstated. The broker's estimates suggest a 6.3% headwind to profit in US dollar terms if the rapid revaluation of the Swiss franc holds up. However, the company's annual report suggests around a 2.5% sensitivity for CHF/USD movements. Macquarie believes CSL will weather the headwinds while the company cost base remains advantageous versus its peers.
CSL trades near fair value in Morgan Stanley's estimation, using a price/earnings relative methodology. The USD/CHF is a key currency paring for transactions and the broker estimates around 20% of the company's costs are incurred in Swiss francs but less than 4% of its revenue. Morgan Stanley estimates a shift to overnight FX spot rates from prior assumptions would reduce CSL Behring earnings by 9.3% on a full year basis with no hedging.
On another front, there may also be downside risk to earnings from heightened competition in the Immunoglobulin (Ig) market. Morgan Stanley notes industry growth is moderating while the coagulation franchise is contracting. The broker expects investors will maintain the premium vested in CSL for the stock's perceived short-term defensive characteristics. The broker retains an Equal-weight rating as the stock is currently trading around 2.0% above its price target of $81.12.
Another stockbroker, Morgans, expects significant transaction and translation impacts, estimating 10% of the top line and 20% of the costs are exposed to the Swiss franc. CSL uses forward FX contracts to hedge risk and covers an estimated 75% of profit but the broker observes the contracts are short dated. Moreover, Morgans believes the company's competitiveness may come under pressure as higher costs would need to be passed onto customers to maintain margins and market share. Hence, the broker believes investors may question the company's current "safe haven" status and reputation for earnings certainty, while there is increased downside risk to the extended earnings multiple. That said, Morgans sticks with its Hold rating and $83.25 target pending additional insights.
On a broader market perspective, CSL also presented at the JP Morgan health care conference. The broker expects the company will maintain above-market growth in core Ig products despite the increased competitive threat from Baxter's long-awaited launch of HyQvia. CSL is confident Hizentra's differentiated product features will mean its leadership is maintained. The broker believes the track record in unlocking the value in its R&D portfolio stands CSL in good stead. Further geographical and label expansion as well as momentum in the breakthrough medicines should contribute strong growth in earnings and JP Morgan retains an Overweight rating.
On FNArena's database the consensus target is $84.43, down from $85.02 ahead of the news. The target implies 1.7% upside to the last share price. Ratings include four Buy, three Hold and one Sell (Citi).
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