CSL in a strong position for growth

Chris Hall

Ellerston Capital

CSL delivered a very strong result with NPAT and EPS increasing 11% on a constant currency basis. The result for H120 was slightly weaker than market expectations but the company also lifted FY20 NPAT guidance to 10%-13% growth on a constant currency basis. The market was broadly anticipating this with pre-result EPS growth forecasts of 11% by the Street.

The result was driven by particularly strong sales growth from IG (+26%), with Privigen (+28%) and Hizentra (+37%) being the key contributors. Competitor supply challenges certainly helped the Privigen & Hizentra result.

From an industry perspective, global IG demand continues to exceed supply and CSL will continue to invest in its plasma collection centre base, with 40 new centres planned to be opened this year. Albumin suffered a big decline in sales (-33%) due to one-off changes in the China distribution model. Strong underlying growth in China is set to continue going forward, with Europe and Emerging Markets providing longer term opportunities.

Specialty sales increased 7%, perhaps a little lower than expectations, with peri-operative bleeding products increasing 11%, but other Specialty products rising only 3%. Seqirus (Influenza Vaccines) revenues rose 9% with strong growth coming from Europe and North America. The bulk of sales from Seqirus occurs in H1, which captures the northern hemisphere winter.

Finally, Haemophilia sales increased 4%, a little softer than expected with Plasma Coagulation products seeing more competitive pressure.

In summary, this is a strong 1H20 performance, with IG the standout, followed by Recombinants and ex-China albumin sales growth being also robust.

Earnings upgrades justify the high sticker price

Taking a longer term perspective, CSL will continue to deliver strong compounding earnings and dividend growth for years to come. While optically, the stock may look expensive looking 12 months ahead (CSL is trading on a PE multiple that is greater than two standard deviations above its long-term average), the reality is that earnings upgrades continue to occur for this stock on a frequent basis as fundamentals continue to improve. Also, the compounding dividend effect is stark, with A$ DPS growth of 18% for this half result. I see CSL as a core, long-term holding in any Australian equity portfolio.

A strong position for growth

CSL remains in a strong position to continue its growth trajectory for some time. A favourable industry structure in IG, which sees demand continue to exceed supply on the back of increased disease awareness and improved diagnosis, increased usage of IG for chronic therapies and expanding usage for SID, provides a strong revenue tailwind. Albumin one-off impacts from a changing distribution model in China will abate and see underlying growth re-emerge in this product going forward whilst Seqirus will continue its meaningful contribution.

The key catalysts for continued sustainable growth for CSL centres around continued expansion of plasma collection centres, maintaining a double digit R&D spend as a percentage of revenue in order to provide continued product development in plasma, recombinants, cell & gene therapy and influenza vaccines. There will be great focus on the phase 3 trial outcome of the CSL 112 products (cardiovascular, coronary focus). While there are a number of competitive threats on the horizon, CSL has regularly faced competitive challenges and has a well-deserved reputation for developing or finding new sources of income to support earnings growth, along with the ability of management to continue to upgrade earnings guidance for years to come.

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Chris Hall
Chief Investment Officer
Ellerston Capital

Chris is an industry veteran with over 28 years' experience including roles at Blackrock, Argo Investments and JB Were. He is passionate about providing investors with a strategy focused on sustainable and growing income generation.

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