Cochlear: Its deafening – new pt starts and clinic capacity

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
19 August 2020, 11:00 AM
Sectors Covered:
Healthcare

  • FY20 results were negatively impacted by COVID-19 deferral of elective surgeries, with sales declining across all divisions, margins contracting, underlying profit falling by double-digits and the dividend remaining suspended.
  • While Cochlear Implants (CI) fell 8% (2H -26%) and varied across regions, it fared better than expected, with Services (-12%; 2H -23%) and Acoustics (-24%; 2H -32%) taking the brunt of the blow from COVID-19.
  • Although CI volumes are recovering in multiple developed markets and China, the extent of supportive patient 'catch-ups' remains unknown, with the lack of FY21 guidance deafening and likely disruption to the new candidate pipeline on clinic closures, lower capacity and ongoing COVID-19 risks.
  • We have adjusted our FY21-22 estimates, with rolled forward multiples increasing our target price (Morgans clients can login to view detailed reports and price targets). We remain defensively positioned, with a Hold.

COVID-19 impacts; div remains suspended; no FY21 guidance

FY20 results were negatively impacted by COVID-19 deferral of elective surgeries, with revenue down 7% (A$1,320.6m), underlying income falling 42% (A$154m) and adjusted profit (A$238m, -186%) supported by cA$37m in 'other income' (eg government grants; contingent consideration release) and lower tax (22%, -3pts).

Product sales were down across the board (A$1,352m, -6%; -11% in cc), with Cochlear Implants (CI) declining (A$818m, -8% in cc), but faring a bit better than Services (A$396m,-12% cc) and Acoustics (A$139m, -24% in cc).

GMs fell 120bp to 74.5%, but benefited from lower warranty costs offset by lower production, with opex held flat (A$749m) and A$52m in FX losses/other expenses, seeing margins decline (-10.6pts to 15.3%). OCF fell A$454m, to -A$158m, mainly on A$420m in patent litigation expenses, and the dividend remains suspended.

No FY21 guidance was provided given “significant uncertainty in forecasting revenue”.

CI vols improving in dev mkts; gaining sh; B/S solid; CF breakeven

The key positives include:

  • >80% CI surgery started in developed markets by the end of Jun, with volumes broadly in line on pcp across the US, Germany, but slower in the UK, Spain and Italy
  • China strong recovery
  • Surgical mix by age in developed markets, broadly in line with pre-COVID-19 levels (25% peds/75% adult)
  • Countries enabling greater levels of remote access and programming
  • US Acoustic Jun/Jul surgery volumes c70% pre-COVID-19 levels, with strong uptake of Osia 2
  • Growing R&D investment to extend product position
  • B/S remains solid and liquidity strong
  • Around CF breakeven

Catch-up surgeries; new candidate pipeline; clinic capacity limited

The key negatives include:

  • 'Catchup' surgeries supported recovery of CI, with the adult segment now caught up.
  • Little visibility on the new candidate pipeline, with uncertainty around the typical 9-12 months of referrals and scheduling.
  • Clinic closures have delayed access to sound processor upgrades, despite remote services.
  • Clinical capacity is below historic levels and patients volumes prioritised.Emerging market (c20% of CI revenue) surgeries (ex-China) remain very low, with management not optimistic of a quick recover.
  • Uncertainty and variability with Acoustics volumes, with no UK recovery.
  • GMs are expected to fall and government assistance programs to moderate.
  • No dividend until profitability is sustained.
  • There is uncertainly around multiple waves of COVID-19.

Valuation remains extended; waiting for a better entry point

We have adjusted FY21-22 earnings changes and rolled forward our valuation multiples, which sees our DCF/SOTP-based target price 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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