Morningstar | Transfer of Analyst Coverage on CSL, Maintain FVE of AUD 207 per Share
We have transferred analyst coverage of narrow-moat-rated CSL and maintain our AUD 207 per share fair value estimate. The reduction in the AUD/USD exchange rate from 0.73 to 0.71 is a minor benefit to our fair value estimate, however, this is offset by several other changes to our forecasts. We have lowered our near-term revenue growth rate assumption, in line with recent guidance from the annual general meeting for 9% growth in fiscal 2019. We have also increased our near-term capital expenditure forecasts and now sit in the middle of CSL’s USD 1.2 to 1.3 billion range. The company reiterated guidance for net profit after tax to grow by 10% to 14% to USD 1.88 billion to USD 1.95 billion. With the reduction in our near-term revenue growth forecast, our net profit forecast of USD 1.925 billion sits just above the middle of the guidance range.We reiterate our narrow moat rating, underpinned by CSL’s high-quality blood products franchise built on cost advantage and intangible assets. CSL, along with Baxter and Spanish firm Grifols, dominate the production of blood-plasma-derived immunoglobulins globally and benefit from a cost advantage relative to potential new entrants. It would be difficult for a new competitor to enter with the scale required to achieve low unit costs sufficient to compete with CSL and its two large peers.
In addition to cost advantage, CSL benefits from intangible assets over a range of proprietary products. The products are used to treat conditions such as immune deficiency, haemophilia and rare diseases. Approximately 85% of CSL’s revenue and nearly all profit comes from the moaty blood products-focused CSL Behring division. The remaining 15% of revenue is from CSL’s vaccines business Seqirus. It is in turnaround and improving but contributed a modest 2% to group EBIT in fiscal 2018. We think Seqirus will continue to improve and don’t believe it materially impacts the company’s overall narrow moat.
Our AUD 207 per share fair value estimate now incorporates a 9.8% compound growth rate in revenue to fiscal 2023, down from 10.7% compound previously. Our forecast 9.8% per year revenue growth forecast is broadly consistent with historical growth for the five years ended fiscal 2017 of 9.2%. We expect underlying market growth for immunoglobulins and albumin to continue in line with history and for stronger growth to come from CSL’s recent successful product launches. In addition, the company will roll out its new products across geographies, which should further support growth.
CSL’s strategy is to build out plasma collection capacity ahead of demand but longer-term supply may become an issue given the growth in demand for the underlying products. CSL plans to add a further 30 to 35 collection centres to its network in fiscal 2019, up from 27 new centres in fiscal 2018. Our fair value estimate also incorporates a modest improvement in the operating margin to 32.4% by fiscal 2023 from 30.1% in fiscal 2018. We expect this improvement to be driving economies of scale with volume growth, the turnaround in the Seqirus vaccine business, and a positive mix shift towards new higher margin proprietary products.
We are impressed by CSL’s dedication to research and development, or R&D, and believe it fuels the firm’s revenue growth and fortifies the moat. The historical track record for effectiveness of the R&D spend is impressive. In fiscal 2019, CSL will again increase its R&D spend by USD 150 to 200 million to approach USD 900 million, or 10% of sales. We expect CSL to continue to spend 10% of sales in future, which will see a material uplift in the firm’s capabilities as revenue grows. R&D is vital to underpinning the firm’s cost advantage and intangible assets by evaluating new ways to scale production and developing new products. We like the strategy of leveraging the strong blood products franchise into other adjacent areas such as organ transplant. The firm’s ability to apply existing products to new unmet needs is appealing and may also allow CSL to progress products relatively quickly. We keenly await the company’s annual R&D update in December.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.