Morningstar | CSL Tracking to Top End of Profit Guidance, FVE Raised to AUD 212 per share
Narrow-moat CSL’s first-half fiscal 2019 result met our expectations. That said, the profit mix was slightly different with the turnaround in vaccines a highlight. Net profit aftertax increased 6.8% to USD 1.16 billion, driven by 8.6% higher revenue versus a year ago. Modest compression in the EBITDA margin to 38.2% from 39% reflected higher selling, administration, marketing, and research and development costs. CSL is increasing sales and marketing expenditure to support the commercialisation of recent core product launches. Unfavourable currency moves detracted by USD 35 million. On a constant currency basis, net profit after tax was up 10%.We maintain our full-year fiscal 2019 net profit forecast of USD 1.93 billion. CSL’s vaccines division, Seqirus, is tracking slightly better than expected. But for CSL Behring, there were a couple of patches of first-half weakness in albumin and haemophilia. Sales for both product groups declined modestly versus first-half fiscal 2018. That said, CSL is on-track overall and management expects strong demand growth for its core products to continue. Guidance remains for net profit aftertax of USD 1.88 to 1.95 billion on a constant currency basis. However, the firm now expects to come at the upper end of the range, consistent with our forecast.
Our fair value estimate increases modestly to AUD 212 per share from AUD 207, adjusting for the time value of money. Shares are modestly undervalued, trading at an approximate 12% discount. We continue to like the firm’s medium-term growth prospects, driven by the commercialisation of the five major new products launched in the past two years. We see further upside from increasing penetration of existing markets, entering new markets and broadening the range of applications. Longer-term, the firm’s commitment to R&D is key. It should sustain product innovation and support the intangibles-based competitive advantage CSL enjoys in its core CSL Behring division.
We continue to like CSL’s unchanged strategy of focusing on five key areas in the application of its intellectual property. Those key areas are immunology, haematology, transplant, respiratory, and cardiovascular. Its mission to improve the quality of patients’ lives is valuable. Focusing on the needs of the patients is key to the company’s long-term success. R&D is key to continued innovation. This innovation sees five potential new products in human trials. Management’s dedication to R&D is exemplified by its commitment to invest 10% to 11% of revenue annually. To this end, CSL has opened its new Bio21 research facility in Melbourne and plans to roughly double the number of scientists there to 150.
There were no major R&D updates this half with the annual R&D day just two months ago. Importantly though, recruitment for the key phase III trial for CSL 112 is on track. More than 1,000 patients are now signed up. We see a large unmet need for CSL 112 to treat recurrent cardiovascular events following a heart attack. Our unchanged risk-weighted fair value estimate for CSL 112 accounts for approximately AUD 60 per share, or 28% of our overall AUD 212 per share fair value estimate.
The recent successful product launches, and the strong growth that has followed, has stretched CSL’s ability to meet demand. The company is continuing to invest in its blood plasma collection network and manufacturing facilities. These industry leading assets are core to underpinning CSL’s cost advantage relative to peers and would-be new entrants.
CSL has suffered some modest increases in the cost of collecting blood plasma. This reflects lower unemployment in the U.S., which necessitates higher payments to induce donors, and the opening of new collection facilities. New facilities operate less efficiently as production slowly ramps up to full capacity. But we see the cost issues as partly cyclical and temporary. Longer term, the expanded scale should allow CSL to continue to focus on further collection and manufacturing efficiencies, supporting its cost advantage moat source. In addition, the strong growth of CSL’s high value new products is more than compensating for higher near-term costs. Management expects full-year margins to rise driven by a favourable mix shift to higher value products.
The firm’s Seqirus division continues its turnaround and, if anything, is tracking slightly better than we expected. Innovations with the firm's higher-priced quadrivalent flucelvax and Fluad vaccines underpinned the strong result. First-half fiscal 2019 EBIT increase 65% to USD 304 million versus USD 185 million in first-half fiscal 2018. Fluad sales more than doubled while data shows flucelvax was more effective than standard egg-based vaccines in preventing influenza-like illness in the 2017/18 U.S. flu season. CSL is investing in manufacturing and distribution capacity to support the strong demand growth.
CSL is engaged in the research, development, manufacture, marketing and distribution of biopharmaceutical and allied products. Co.'s operations are divided into three segments: CSL Behring, Seqirus, and CSL Intellectual Property. CSL Behring is engaged in manufacturing, marketing and developing plasma therapies (plasma products and recombinants). Seqirus is engaged in manufacturing and distributing non-plasma biotherapeutic products. CSL Intellectual Property is engaged in the licensing of intellectual property of Co. to unrelated third parties. Co. operates primarily in five specific geographic areas, namely Australia, the U.S., Germany, Switzerland, and the U.K.
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