Cochlear: FY21 inline- Margin recovery likely protracted

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
23 August 2021, 10:00 AM
Sectors Covered:
Healthcare

  • 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 

Event

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).

Analysis

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). 

Investment 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.

Price catalysts

AGM- 19 Oct-21; Sonova (SOON.SW- Not covered) Investor day 14 Sept-21 

Risks

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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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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