Cochlear: 1H solid - hearing is believing

About the author:

Author name:

By Dr Derek Jellinek

Job title:

Senior Analyst

Date posted:

16 February 2023, 7:30 AM

Sectors Covered:

Healthcare

• Cochlear's (ASX:COH) 1H results were better than expected, underpinned by strong sales growth in both developed and emerging markets, but OPM declined on growth initiatives.
• Cochlear Implants (CI; +14%) and Acoustics (+17%) drove the result, on strong demand for the new Nucleus 8 (N8) sound processor and recovery in surgeries, while Services was expectedly flat in front of the N8 rollout.
• We see continued momentum, with FY23 guidance reaffirmed, implying a strong 2H (+25% at the mid-point), underpinned by strong fundamentals and progressively improving trading conditions.
• We have adjusted our FY23-25 estimates and increased our target price to (login to view). Add.

Event

1H results were above expectations, with underlying NPAT of A$142m (-10%; -6% in cc; Morgans A$139m) on total revenue of A$885m (+8%; Morgans A$868m). 

GM was maintained (75%) on procurement benefits and manufacturing efficacies, while increased opex (+17% in cc) on market growth initiatives and cloud computing (A$17m) put pressure on EBIT (-32%; A$186m; margin -6pp, 26%).

OCF of A$89m (-36%) reflects lower underlying earnings and increased WC on timing of N8 launch, but the dividend was flat (A$1.55; payout ratio, +7pp; 72%)

FY23 guidance was reaffirmed: NPAT A$290-305m (+5-10%;+8-13%, ex- A$25m post-tax cloud computing and Oticon Medical acquisition), weighted to 2H.

Analysis

Cochlear Implants (CI) unit growth was solid (+14%, 21,249; 2HFY22 +3%) and sales up 12% (A$513m, +9% in cc), with emerging market (EM) growth (+20%) outpacing developed markets (DM >10%), as clinical capacity has “stabilised” and growth is well above pre-COVID levels across most countries.

The 5pp variance between CI unit and sales growth is due to product mix (ie more EM vs DM), pricing (ie EM lower; DM flat), and technology exchange program, where N8 revenue is deferred (B/S A$75m, +36%), but expected in 2H.

Acoustics (13% of total sales; A$121m, +17% in cc) was strong, with solid demand across all regions for Osia 2 system and Baha 6 Max sound processor upgrades, with the continued recovery in surgery volumes following COVID-related surgery delays and lockdowns.

Services (c30% of total sales) were flat (A$259m) in anticipation of the N8 launch and cycling a tough comp (1HFY22 +21% in cc) following COVID-related clinic shutdowns. 

Leveraging a strong B/S with adequate capital for investing activities, management commenced a $200m “progressive” share buy-back over at least 3-5 years, with A$75m (c0.5% of shares outstanding) committed over the next 12 months.

We view the strong rebound in CI, stable surgical and clinical capacity, and the ongoing N8 rollout, along with management’s confidence and strong implied 2H guidance (+25% at mid-point), as pointing to progressively continuing momentum.

Forecast and valuation update

We increased FY23-25 EPS forecasts up to 2.7%.

Our blended DCF, PE and EV/EBITDA based price target increases to (login to view).

Investment view

Despite ongoing uncertainties, trading conditions look to be gradually improving, with management confident of the opportunity to grow its markets, suggestive of a solid earnings trajectory.

Price catalysts

Sonova (SOON.SW- Not covered) FY23 results 16 May-23.

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.

Find out more

You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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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.