Cochlear: FY21 inline- Margin recovery likely protracted
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 23 August 2021, 10:00 AM
- Sectors Covered:
- FY21 results were inline with our estimates, albeit below consensus, with double-digit earnings and sales growth driven by market share gains/growth, and rescheduled surgeries from COVID shutdowns across key regions.
- Cochlear Implants (CI) grew 19% (cc; 7% vs FY19), while improving clinic capacity drove strong growth in upgrades/accessories and improving surgeries/new product sales help lift Acoustics.
- While guidance points to continued momentum, the retracement of pre-COVID margins is key and looks protracted, with variance between developed vs emerging markets, increasing costs, and unknown impact of emerging viral variants.
- We have adjusted our FY22-23 estimates and rolled forward our valuation multiples, with our target price increasing to (login to view). Hold
FY21 results were inline with our expectations (but below consensus), with NPAT A$236.7m (+54%; +51% in cc; Morgans A$235m; Consensus A$243m) on sales of A$1,493 (+10%; +19% in cc; +6% in cc on FY19 unaffected by COVID).
GM contracted 2pp (72.5%; 2H -70bp 72.8%), impacted by FX (c50%), lower efficiencies on new product manufacturing and obsolete product write-downs, while OPM (+6.7pp; 22%) was held up by flat opex and lower D&A, resulting in underlying profit strength (A$330.2m, +60%; +57% in cc)
OCF of A$271m (vs -A$158m impacted by final A$75m payment in relation to AMF patent dispute) supported a final dividend of A$1.40 (FY21 A$2.55, +59%; 71% payout ratio).
While cochlear implant (CI) sales grew 19% in cc to A$898.6m and recovered hoh (1H -3%, 2H +27%), driven by market share gains/growth and rescheduled surgeries from COVID shutdowns, CI unit growth was up 15% (36,456; 1H -8%, 2H +49%), as developed market growth (c20%) outpaced EM (c10%).
Services (29% of total sales; A$438.5 (+11%; +19% in cc) in cc, 1H -5%, 2H +31%) improved through the year on growing clinic capacity and new sound processor demand, while Acoustic (10% of total sales; A$156.2m (+12%; +22% in cc); in cc, 1H -11%, 2H +47%) gained on increasing surgeries and US product switches to the Osia 2 System.
Management expressed confidence in continued market growth and recovery in surgery rates, providing FY22 guidance of NPAT A$265-285m (+12-20%).
However, we view unpredictability in COVID-based recoveries (ie developed markets better, yet varied, emerging markets more prolonged), along with increasing expenditures (eg Opex >50% of sales; Capex +50%, with capitalised IT (A$100-150m over 4-5 years) at risk of being expensed), as limits to operating leverage.
Forecast and valuation update
While we have lowered our GM and OPM assumptions, lower D&A, net interest and tax, sees NPAT increase up to 4.7% through FY23.
Changes to our earnings forecast and rolling forward valuation multiples, sees our blended DCF, PE and EV/EBITDA based price target increase to (login to view).
While COH is a quality name that tends to catch a bid in a volatile market, we continue to believe full recovery from COVID-based disruptions will take longer than expected, with margins to remain under pressure over the medium term, which is inadequately reflected in current trading levels.
AGM- 19 Oct-21; Sonova (SOON.SW- Not covered) Investor day 14 Sept-21
COVID impacts; faster/slower growth across product lines; Services volume driving/slowing market penetration, decreased/increased costs, FX impacts and increasing/lessening competitive threats.
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