22 November 2019
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CSL's 'exceptional' result fails to inspire market

Paul Rickard
17 August 2017

By Paul Rickard

CSL must be close to, if not the best, Australian listed company. Shareholders who were lucky enough to participate in the privatisation of the old Commonwealth Serum Laboratories in 1994 paid $2.30 for their CSL shares. Twenty three years later, and following a 3 for 1 share split in 2007, those shares are now worth a touch over $125. A capital return of 16,300%.

CSL Share Price - 1994 to 2017

Source: CommSec

And while CSL chooses to largely re-invest and doesn’t pay high dividends, on a per share basis, dividends have also grown very impressively. In its first full year as a private company in 1995, it paid 12c in dividends. This year, shareholders will receive 175.6c - a factor increase of almost 15 times. A great example of “dividend growth”.

Yesterday, CSL announced its full-year profit result. While CSL exceeded its own profit guidance, it didn’t quite live up to some of the analysts’ expectations about growth going forward, and eased on the market, slipping 1.5% to close at $125.27. That’s what happens sometimes - let’s take a closer look.

The CSL Result

The result was headlined as “CSL delivers exceptional performance”, with net profit of US$1,337m, up 16% on FY16. On a constant currency basis (CSL’s preferred measure), NPAT grew by 24% to US$1,427m, higher than CSL’s guidance in February for profit growth in the range of 18% to 20%.

Total revenue for the group increased on a constant currency basis by 15% to US$7,002m. The CSL Behring business, which contributes the lion’s share of the revenue at US$5,891, grew revenue by 12% on a constant currency basis. Immunoglobulins, where CSL is the global leader, saw revenue growth of 14%.

Revenue from the recently acquired loss making Seqirus influenza business increased by 23%. CSL says that this business is tracking to plan and it should break-even in FY18.

Other highlights included:

  • Strong early demand for CSL’s new haemophilia product, IDELVION;
  • The company is very excited about its specialty product HAEGARDA, which was launched in July. This product prevents HAE (Hereditary Angioedema) attacks, a very rare and potentially life threatening condition; and 
  • The acquisition of a majority stake in Chinese plasma manufacturer Ruide closed on 2 August. CSL expects the plasma market in China to grow over the next 5 years at circa 15% pa, with demand forecasted to outstrip supply.

Looking ahead, CSL has guided to revenue growth in FY18 of 8% on a constant currency basis, and underlying NPAT in the range of $1,480m to $1,550m - an increase of 10.6% to 16% on a constant currency basis. The broker analysts were a little underwhelmed by this guidance, in part because a return to profitability for the Seqirus business implies a slower rate of growth in profit by the CSL Behring business, and some of the bullish discussion on the new products.

CSL says that it is investing to support sales growth, and that capex in FY18 will be US$900m to US$1bn. With this level of capex and net debt to EBITDA at 1.5 times, the higher end of CSL’s target range of 1.0 to 1.5, CSL won’t conduct a further share buyback in FY18 when the current on-market buyback completes.

CSL also pointed to FX headwinds, particularly with the sharp appreciation of the Euro and Swiss Franc against most currencies in the last six weeks of the financial year. While CSL sells in 60 countries, the bulk of its manufacturing is located in Switzerland and Germany. 

The Brokers

Going into yesterday’s financial report, the six major brokers who cover the stock were fairly positive on CSL. According to FNArena, there were 4 buys and 2 neutral recommendations on the stock. The consensus target price was $137.87, a 10.1% upside to the current price. Analysts were forecasting FY18 earnings per share to grow by 18.5%.

With CSL now guiding to a lower rate of profit growth, forecasts are likely to be revised down a touch, although there was a sense at the briefing that Management was being somewhat conservative. This may also lead to a small reduction in the consensus target price.

Bottom Line

CSL is trading on a multiple of around 29 times FY18 earnings, which is not cheap by any standards. That said, there aren’t too many companies that have been able to consistently grow earnings at double digit rates of growth. And arguably, it is Australia’s best company and should be a core stock in growth portfolios. 

Around $125, CSL is no bargain buy, and if the Aussie dollar tracks higher, this will hurt the share price. But don’t expect too much of a sell-off - dips will be keenly bought. If you don’t own any CSL shares, put it on the shopping list.  

Disclosure: The author and his SMSF own shares in CSL.

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