CSL: Donors need not a flip of a switch

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
20 August 2020, 4:00 PM
Sectors Covered:
Healthcare

  • FY20 results were solid and roughly in-line, with better than guided NPAT (helped by lower tax), strong sales across key products and good operating leverage.
  • Ig growth continues to impress and Seqirus was solid on COVID-19 related demand, with Specialty and Haemophilia growth more modest, and declining Albumin sales, well flagged on transition to direct China distribution.
  • While we expect the demand for plasma, recombinant products and vaccines to remain strong, and view reversion of China Albumin growth as fortuitous, soft FY21 guidance (NPAT 0-8%) reflects plasma collection challenges that may persist longer than the market anticipates as donor behaviour isn't easily swayed.
  • We adjust FY21-22 estimates and roll forward our valuation multiples, with our price target increasing (Morgans clients can login to view detailed reports and price targets).

Net profit > guidance (tax helped); rev, op income solid, margins up

FY20 results were roughly in line, with NPAT above guidance (+17% in cc; US$2,103m; guidance +10-13%; Morgans US$2,118m), but helped by lower tax (18.3%; 1H, 20% 2H,15%), on solid revenue (+9% in cc; US$9,151m; Morgans US$9,158m) and strong underlying profit (+15% in cc; US$2,717m; Morgans US$2,791m).

GPM improved 140bp to 57.4% (in cc), on favourable price/mix/geography, with OPM up 170bp (in cc) to 31%.

OCF improved 51% to US$2,488m, impacted by the changing albumin distribution model in China and good WC management, supporting the final dividend (US$1.07, +9.2%).

Soft guidance reflects plasma supply/demand imbalance…

While we believe demand for plasma, recombinant products and vaccines is likely to remain solid, CSL faces challenges in plasma collections due to the evolving COVID-19 pandemic.

Reflective of this supply/demand imbalance, FY21 guidance is soft (cc NPAT US$2,100-2,265bn, 0-8%, on 6-10% revenue growth).

What we like includes:

  • Jul/Aug plasma collections trending up, albeit not as much as expected.
  • FDA lowered plasma hold to 45d (from 60d).
  • Numerous COVID-19 initiatives (eg donor pre-assessments, enhanced cleaning/disinfectant procedures
  • Safe passage letters).
  • No supply chain interruptions.
  • Seqirus profitability strong (FY20 EBIT US$265m, helped by 11% fees on pandemic revenues), with up to 60m doses of seasonal influenza vaccines for NA flu season and margins uplift on US/EU/UK approval for Fluad QIV in 65+ year olds.
  • Sales of Albumin to normalise (est cUS$130m profit gain), with no supply constraints.
  • Kcentra to continue to perform in peri-op bleeding (FY20 +12%), with no COVID-19 impact seen.

…but the pandemic continues and behavioural change is difficult

Ares of concern include:

  • Collections fell 5% in FY20 (>30% in 4Q), with “a lot of uncertainty” as the pandemic continues to evolve.
  • Plasma donor returns takes effort and time, more so with COVID-19 risks.
  • Collection costs to remain underpressure (FY20 +9%), with increased staffing (who receive supply payments), SG&A (eg social media/marketing, saftey measures).
  • More PPE.
  • US unemployment benefits.
  • 2HFY20 immunoglobulin growth slowed (+18% vs 1H +26%).
  • Ex-normalistion of Albumin sales into China, NPAT guidance -3% at the mid-point; capex step-up (FY21 cUS$1.6bn, +33%), with ROIC falling (FY20 21.6%, -270bp) with use of “unproductive capital” on the B/S and uplift expected in 2-3 years.
  • GM expected to be flat to down.
  • R&D expenses c10-11% of sales.

Remains a core holding; continue to wait for a better entry point

Our FY21-22 NPAT estimates decrease up to 4.1%.

We roll forward our valuation multiples, which sees our DCF/SOTP-based price target increase (Morgans clients can login to view detailed reports and price targets).

Find out more

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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