Cochlear: 1H beat - confidence increasing in the outlook

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
23 February 2022, 9:00 AM
Sectors Covered:
Healthcare

  • 1H results were better than expected, underpinned by strong sales growth, expanding GPM and OPM, and solid OCF (+44%). 
  • Services (+21%) and Acoustics (+40%) drove the results, on strong demand for sound processor upgrades and new acoustic products, respectively, while Cochlear Implants (CI) increased modestly (+7%), with sales essentially flat (+2%) impinged by varying COVID-related surgical restrictions and lockdowns. 
  • While clinical capacity and staffing issues are near term headwinds to a strong rebound in CI, as the world opens back up and the surgical backlog addressed, management expressed increasing optimism in the medium/longer outlook. 
  • We have adjusted our FY22-24 estimates and increased our target price to (login to view) on multiple roll forward. Move to Add

Event

1H results were above expectations, with underlying NPAT of A$157.5m (+26%; +20% in cc; Morgans A$131m) on total sales of A$821.7 (+10%; +12% in cc; Morgans A$760m). 

GM expanded 3pp (75%) on higher manufacturing efficiencies, while OPM (+3pp; 27%) managed a gain despite opex (+14%) increasing from COVID-affected lows. 

OCF of A$125m (+44%) reflects strong sales growth and expanding margins, partially offset by increased WC, supported a dividend of A$1.55 (+35%; 65% payout ratio). 

FY22 guidance reaffirmed: NPAT A$265-285m (+13-22%), now incorporates A$1820m (pre-tax) cloud accounting changes (so essentially a c5% upgrade). 

Analysis

Services (c30% of total sales; A$256.5, +21% in cc) and Acoustics (c10% of total sales; A$100.9m, +40% in cc) were the standouts, supported by a growing recipient base, demand for new products and importantly, improved clinic access from COVID-related surgery delays and lockdowns. 

Cochlear Implants (CI) unit growth was modest (+ 7%, 18,598) and sales essentially flat (A$457.9, +2% in cc), with emerging market growth (+30%) outpacing developed market growth (-2%), but overall volumes tracking ahead of pre-COVID levels with continuing variability in performance seen across countries. 

As operating theatre capacity remains constrained (so more time is being spent on upgrades), management expects 2H to continue to be weighted to Services and Acoustics, while the CI trajectory remains at the mercy of COVID impacts (eg region-specific elective surgery restrictions and hospital staffing shortages). These issues, however, appear more temporary than structural. 

While bringing forward demand ultimately leads to future periods of softness, the fact that clinics are opening and people are coming back, coupled with management's increasing confidence that the recovery will continue, flagging strong demand, a solid pipeline of candidates and surgeons keen to operate, increases our belief that Coclear (ASX:COH) can manage though bumps in the road. 

Forecast and valuation update

We have made nominal changes to our FY22-24 earnings forecast. 

Multiple roll forward sees our blended DCF, PE and EV/EBITDA based price target increase to (login to view). 

Investment view

While we continue to believe a full recovery from COVID-based disruptions still has time to play out, improving demand and strong pipeline, coupled with management's increasing confidence, is all suggestive of an improving earnings profile. 

Risks

Sonova (SOON.SW- Not covered) FY22 results 17 May-22.

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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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