CSL: Solid underlying growth

Morgans Financial Limited

While we remain confident in the future growth trajectory, sector sentiment remains weak and valuation a bit extended, so we would be happy to take profit in any overweight positions as a tactical trade for more nimble investors.

Solid underlying growth helped by competitor stumbles...

1H17 underlying NPAT was in-line, as expected given its pre-release (US$806m, +36.2% cc; ex-Novartis acquisition; Morgans US$800m), with strong underlying profit (EBIT US$1,095m, +38% cc) underpinned by solid product sales (US$2,963m, +18% cc).

Key highlights:

  1. Above market Immunoglobulin sales (US$1,426m; +22% cc) on Privigen demand (+34%), supported by competitor stumbles, and Hizentra (+14% cc) new patient starts, balanced strength in Albumin (US$433m; +19% cc).
  2. Specialty products (US$590m, +25% cc), on strong underlying demand and competitor issues.
  3. Haemophilia was soft (US$514m, +2% cc) as solid recombinant sales (+15% cc) on the back of strong Idelvion uptake, were pulled down by softness in Helixate and plasma derived products (-6% cc).
  4. Seqirus (+14% cc) remains on track, targeting breakeven in FY18 and sales/EBIT of US$1bn/20% in FY20;
  5. EBITDA margins were higher (+530bp to 34.5%); 6) OCF was down 5.8% to US$664.2m, mainly on tax payment timing, but supporting 10% growth in the dividend (US$0.64).

…but how long can CSL hold onto its newly minted market share?

Clearly, CSL benefited from competitor stumbles in both Immunoglobulins and Specialty segments, putting up cc growth of 22% and 25%, respectively.

While management retained FY17 guidance (cc NPAT 18-20%), indicating that competitors have resolved "most issues" and pointed out several 2H headwinds (eg R&D phasing; increased interest expense; and typical Seqirus seasonality 75/25 split), we believe 2H implied growth of c3.5% may prove conservative in light of the portfolio’s breadth/depth and extended historical exploitation of competitive gaps.

Earnings changes…tracking above the top end of guidance

We have modestly adjusted our FY17-19 earnings estimates, with FY17 estimates exceeding guidance. Our DCF/SOTP-based price target increases on FX changes and adjusted multiples to more historical levels.

A core holding, but trim overweight positions on a tactical trade

While we remain confident in the future growth trajectory, sector sentiment remains weak and valuation a bit extended so we would be happy to take profit in any overweight positions as a tactical trade for more nimble investors.

Contributed by Derek Jellinek, Senior Analyst, Healthcare. Original blog here: (VIEW LINK)


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