Research notes

VSL is a cyclical business, which we believe is close to its earnings nadir. As largely expected, the 1H24 result was weak, with revenue slowing further in the final two months of 1H24. However, commentary was incrementally more positive, with sales activity showing early signs of stabilising and increased customer inquiry levels in certain segments throughout Jan/Feb-24. Our investment thesis has never been about FY24 earnings, rather we believe that through the cycle VSL is a low double digit PER business, with the upside really an earnings story in FY25/26/27 – resurgent demand restoring historical volumes and prices. To this end, our thesis centres on buying cyclical companies on high PERs at their earnings nadir, an investment thesis which remains largely unchanged despite our forecast for a weaker than expected 2H24 earnings contribution. Add rating retained, with an A$8.60/sh target price (previously $9.00/sh).

1H24 saw the Healthscope private hospital transaction further bedded down alongside the Unlisted Healthcare Fund which added four institutional investors in addition to HCW ($1.3bn first close with $650m in total equity commitments). The focus now turns to unlocking the development pipeline. Portfolio metrics remain stable (cash collection 100%; occupancy 99%; and WALE +12 years). Asset recycling has been a focus with further asset sales targeted in 2H24. Current gearing 34%. NTA $1.65. FY24 guidance comprising FFO and DPS of 8cps was reaffirmed. Retain Add with a revised $1.61 price target.

BRG exceeded market expectations for EBIT in the first half of FY24 and provided guidance for the full year that was within the range of consensus forecasts. So why did the shares fall 8.5%, erasing all their gains from the past two months? It was all about revenue, which came in below expectations, raising questions about the strength of consumer demand. This, we think, is too simplistic. Gross margins were much higher than forecast, which says to us that BRG has not followed its competitors down the path of heavy discounting to stimulate sales. Instead it has sought to manage its business to the delivery of profit and to maintain its customer’s perception of product value. We have trimmed our full year numbers, but really not by much. We think BRG will continue to manage costs and new product development to achieve steady growth in earnings. In isolation, we think the share price reaction was overly negative today, but we still can’t bring ourselves to see current multiples as an appealing entry point. We like BRG for the long-term, but it’s not cheap enough for us for chase it until it’s below $23. For now, Hold.

1H results were broadly in line, with double-digit underlying top and bottom line growth and strong OCF. Divisional sales were mixed, with strong plasma collections propelling Behring sales (+14%), while Seqirus was soft (+2%), but above reduced market immunisation rates, and Vifor headwinds expected to “dampened” near-term growth prospects. Notably, Behring GPM expanded above expectations (+230bp, 50%), owing to a DD decline in cost/litre and numerous other initiatives, with ongoing gains expected to continue supporting the return to pre-COVID margins (c58%) still targeting 3-5 years. FY24 guidance (ccNPATA +13-17%) was reaffirmed, implying a solid 2H (+17% at mid-point), despite Seqirus unfavourable seasonality and lower near-term Vifor growth, with double-digit earnings growth over the medium term also reiterated. Our PT move to A$315.35 on CSL112 removal and modest earnings changes. Add.

CGF’s 1H24 normalised NPAT of A$201m was 1% above consensus (A$200m) and +20% on the pcp. Overall, we saw this as a positive result owing to factors including: strong ROE expansion; a solid cost-to-income performance; and the announcement of a value-add IT transformation program. We lift our CGF FY24F/FY25F EPS by 3%-6% reflecting an increase in our life COE margin assumptions, and the cost-out savings from the IT transformation program. Our PT rises to A$7.80. ADD maintained.

RWC has announced the acquisition of Holman Industries in Australia for $160m. We think the deal looks reasonable from both a financial and strategic perspective with Holman marking RWC’s first foray into the ‘water-out’ market, complementing the company’s existing presence in the ‘water-in’ market in Australia. Given management has stated the water-out market is a strategic priority in each of RWC’s three regions (Americas, EMEA, APAC), we think further acquisitions in this space are likely in the future. We increase FY24/25/26F underlying EBITDA by 1%/6%/7% after factoring in the Holman acquisition. We make no changes to existing baseline assumptions. Our target price rises to $4.20 (from $3.56) reflecting a roll-forward of our model to FY25 forecasts. We also increase our PE-based valuation multiple slightly to 15x (from 14x) on an improving medium-term outlook reflecting a stabilisation in the interest rate environment (with the potential for interest rate cuts). RWC is due to report its 1H24 result on 19 February.

Clarity Pharmaceuticals (CU6) is a clinical stage radiopharmaceutical company developing products for use in prostate cancer, neuroblastomas, and neuroendocrine tumours. CU6’s key clinical assets are Targeted Copper Theranostics (TCT) which pairs copper isotopes to bind and aggregate around specific tumours. These light up under PET imaging (diagnostic) and have the potential to deliver therapeutic anti-tumour payloads. The company is undertaking seven clinical trials (three theranostic and four diagnostic trials in progress), including a Phase 3 trial for its prostate cancer diagnostic expected to conclude in CY25. Interest is high in the space with significant M&A activity. Coupled with several key catalysts expected to read out over the next 24 months, CU6 has emerged as a stock to watch.

BPT posted a softer 1H24 result, with underlying EBITDA (-8%) and NPAT (-26%) trailing Visible Alpha consensus estimates. Although it was clear costs were partly driven by temporary factors. New BPT management announced a strategic review into its cost performance, flagging that the largest challenge sits in its offshore operations. Waitsia first gas is expected in mid CY24. We see potential for BPT to regain significant earnings power if it can deliver Waitsia, but at current it looks close to fair value. Maintain Hold rating.

CAR’s 1H24 result was broadly a strong result overall, in our view, with double-digit proforma revenue and EBITDA growth across all operating regions a key takeaway. On an adjusted basis, the result was ~1-2% beat vs consensus at the EBITDA (A$277m, +19% proforma on pcp) and Adj. NPAT line (A$163m, +34% on pcp). We increase our FY24F-FY26F EBITDA by ~4-5% (details below). Our DCF-derived valuation and TP increases to A$32.20 (from A$28.10). Hold maintained.

On the face of it the 1H24 result (EBITDA +26%, NPAT +40%) was a solid beat of expectations. However, there are a number of reversing items that result in forecast earnings and valuation not lifting as much as the beat would suggest. FY24F NPAT upgraded by c.7% and downgraded by a similar amount in FY26F. Target price effectively unchanged at $3.75 (+1 cps). HOLD retained.