Morningstar | No Change to our CSL Valuation From Shift to Direct Distribution in China
Narrow-moat CSL’s announcement of a change in distribution model in China does not impact our AUD 212 fair value estimate for the company’s shares. The change to direct trading away from a third party distributor aligns China with most other geographies in which the company operates and utilises their existing expertise in this area.The intended change in supply chain was communicated by CSL along with its results in February 2019, and the once-off financial effect on fiscal 2020 announced today. We view the explicit cost from the change in distribution model as once-off, reflecting a change in timing of the recognition of sales. Once transitioned, future reporting periods will be materially unchanged from existing forecasts and reflect a full year of sales under the new model. The company guided to a reduction in revenue in fiscal 2020 from the transition of between USD 340 million and USD 370 million and consequently EBITDA by an estimated USD 130 million to USD 140 million.
Our model published Feb. 13, 2019 does not yet reflect these revenue and EBITDA figures. We will update our forecasts in the near term.
The change in distribution model also exposes CSL to greater risk through the supply chain process, but should lead to better profitability. Nonetheless, the ultimate impact on margins, and the working capital requirements associated with the business shift, will only be known post transition. We maintain our EBITDA margin assumption of 38% for the CSL Behring segment in which this change occurs and forecast an improvement in group EBITDA margin to 36% by fiscal 2023 on the back of improved profitability from the Seqirus segment.
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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