CSL Ltd: Structurally sound; FY22 a “transitional year”
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 19 August 2021, 10:30 AM
- Sectors Covered:
- FY21 results were solid, with better than expected top/bottom line growth and improving OCF, but GM contracted on higher plasma costs.
- Seqirus was the standout, on strong demand for influenza vaccines, while Behring was more modest, as Albumin gains on transition to a direct China distribution and cost-outs were offset by Ig/Specialty/Haemophilia growth flattish to down.
- Improving plasma collections are a prelude to an steepening earnings trajectory, but timing is everything, with a lengthy manufacturing cycle (9-12mos), higher costs and ongoing COVID pandemic, adding uncertainty for a quick turnaround.
- We adjust FY22-24 estimates and roll forward our valuation multiples, with our price target increasing to (login to view). Add.
FY21 results were solid, beating on both top (US$10,310m, +10% cc; Morgans US$9,816m) and bottom lines (US$2,375m, +10% cc; Morgans US$2,174m).
While GM contracted (40bp; 56.7%) on higher plasma costs, lower opex supported underlying profit (EBIT US$3,130m, +15%), with margins up 70bp to 30.4%.
Seqirus (15% of profit) was exceptional (US$1,736m, +30% in cc, EBIT US$483m, +95%, margin +7.4pp to 27.8%), underpinned by increased sales of seasonal influenza vaccines (+41%; record doses c130m) and ongoing shift to more differentiated products.
Behring (85% of profit) was modest (US$8,574m; +6% in cc), with margins down 30bp to 30.9%, as higher sales of Albumin (US$1,071m, +61% in cc), on the well flagged transition to the new direct China distribution model, was offset by modest growth in Immunoglobulin (Ig; +3%), and flat to down sales across both Specialty (+2% in cc) and Haemophilia (-4% in cc).
FY22 guidance is targeting cc NPAT between US$2,150-2,250bn (-9% to -5%) on revenue growth between 2-5%, with management flagging a “transitional year”, core plasma products “robust”, but margins contracting on increased costs, and Seqirus strength ongoing.
Plasma collections through FY22 is the key focus and main determinate of margin growth and earnings trajectory into FY23 and beyond, having improved off its nadir (-40%+ last Apr) albeit, not back at pre pandemic levels, on vaccine momentum, CSL initiatives (eg enhanced marketing; new technologies; better donor programs; 40 new collection centres in FY22) and as US COVID stimulus checks ending.
Management is optimistic of more normalised conditions ”sometime this fiscal year”, but noted a recent (Apr) increase in donor fees and expects elevated levels to help maintain collections in the face of COVID variants, ongoing unemployment benefits and competitive pressures.
As such, we view the exact timing of a recovery as uncertain, especially in light of a 9-12 month manufacturing cycle, possibly sticky costs and increasing US restrictions on COVID variants now seen even outside the approaching flu season.
Forecast and valuation update
Our FY22-24 earnings forecasts decrease up to 6.3%, mainly on lowered GM (350bp) and increased operating expenditures across the Behring division.
We roll forward our valuation multiples, with our blended DCF, PE and EV/EBITDA based price target increasing to (login to view).
We view CSL as a core holding and best positioned among its peers to meet growing patient demand, but the near term remains challenged, with timing uncertainty around a full recovery in plasma collections and increasing costs.
AGM 12 Oct-21;R&D briefing Oct-21; CSL112 Phase 3 efficacy readout Oct-22.
Slower than expected US plasma collections; COVID-19 impacts; Ig market share loss; lower uptake of new products; Seqirus headwinds; FX changes and potential M&A activity.
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