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Date : 04/05/2021

CSL Limited

ASX :

CSL

Market Cap : $123.41 Billion

Dividend Per Share : $1.34

Dividend Yield : 1.04 %

Buy

52 Week Range : $242.0 - $320.4

Share Price : $270.95

CSL has been one of the best performing stocks on the ASX in the past 5 years. They continue to push innovation to drive organic growth and industry tailwinds support it. Its a "Buy" from us.

Company Analysis

Aussie healthcare giant CSL Limited (ASX: CSL) has been around since World War 1. They are one of the biggest stocks on the ASX that researches, develops, manufactures, markets, and distributes biopharmaceutical and allied products in Australia, the United States, Germany, the United Kingdom, Switzerland, China, and several other parts of the world. The company operates through two segments – CSL Behring and Seqirus.

The CSL Behring segment offers plasma therapies for the treatment of immunodeficiency, bleeding disorders, hereditary angioedema, Alpha-1 antitrypsin deficiency, and neurological disorders. This segment also conducts research on plasma and non-plasma therapies; and receives license and royalty from the commercialization of intellectual property. The Seqirus segment manufactures and distributes non-plasma biotherapeutic products; and develops influenza vaccines.

CSL earns the majority of its revenues from the USA. Australia makes up just over 8% of its total revenues. Therefore, the company also recognises revenues in USD. On analysing the company by business segment, we can see that CSL earns 86% of its revenues from its Behring business – that is, from plasma therapies. The other 14% is generated from Seqirus – CSL’s flu and influenza vaccine arm. This arm has been on the frontlines of the pandemic and CSL partnered with AstraZeneca, to manufacture vaccines for us Aussies.

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The Behring Segment, CSL’s largest revenue generator has been impacted by the pandemic. Sales have dipped across certain plasma therapies as all non-emergency surgeries and procedures across the world were put under a half in light of the raging pandemic. The rich economies are opening up now and the aggressive vaccination drives are also smoothening operating conditions for CSL Behring.

There has been a supply-demand imbalance here in the plasma therapy segment. The raw materials that fuel about 70% of CSL’s products are driven or come by way of donations, especially in the USA. The donations have slowed down given the pandemic’s effects in not just the USA, but globally. CSL did report that their plasma collections were down 20% in December. We expect this headwind to remain as the coronavirus still continues to mutate and makes the operating environment challenging in the short-term. The picture below illustrates the drop-off in plasma collections.

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Source: CSL

In order to combat these challenges, CSL has enhanced their targeted marketing initiatives, adopted new technologies, reduced their plasma hold period from 60 days to 45 days, and utilised the available finished goods in their inventory. As the donation volumes coming in recovers, the cost per litre of plasma reduces – making the therapy more affordable and creating more of a snowball effect. Therefore, it is important to look past the challenges given that the market already understands the headwinds.

Company Updates

CSL’s organic growth is generated by their dominance in the plasma and influenza vaccines segments and their capacity to invest huge amounts in R&D and innovate. In addition to this, the company also focuses on Mergers & Acquisitions to fast-track.

CSL’s R&D primarily works across Immunology, Haematology, Respiratory, Cardiovascular & Metabolic, Transplant, and Influenza Vaccines. In addition to these therapeutic areas, the firm is now also working on the Covid19 vaccines. As of FY2020, CSL had:

  • 8 products in its Immunology pipeline. 7 of which are in Clinical stage and 1 in the Research phase.
  • 2 Haematology products that have been launched, 2 in Clinical stage, and 3 in Pre-Clinical Stage.
  • 2 Respiratory products in the Clinical stage and 1 that has been launched.
  • Cardiovascular and Metabolic therapy has 2 products in the pipeline, both of which are in the clinical stage.
  • Transplant has 4 candidates in the Clinical stage and 1 in pre-clinical stage
  • 4 Influenza vaccines have been launched and 2 more are in the Preclinical Stage.

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It is safe to say that organic growth will not be a problem for CSL in the medium to long-term. They have several products in their pipeline, one of the best research teams globally working on these product candidates, and an excellent track record of delivering them. The entire cycle is fairly straight-forward: There is an unmet need which results in CSL conducting early stage research by themselves or via collaborations, resulting in product development and clinical trials, moving to manufacturing and distribution, and finally delivered to patients, all within the regulatory boundaries set by authorities. CSL has been doing this for over a 100 years now, and their efficiency is tremendously high.

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Source: Tradingview.com

CSL’s share price performance over the last 5 years makes it one of the best performing stocks on the ASX. Let us face it, if not now, you were holding CSL shares at some point over the past few years. It really is a mainstay across ASX investor portfolios. In the chart above, we compare the CSL share price performance against the broader ASX 200 index (orange line) and the Blackrock’s Global Healthcare ETF (ASX: IXJ) that comprises the top healthcare companies in the world. Well, as everyone can see, CSL blows both out of the water in its performance.

Recently, the share price has come under selling pressure and volatility in light of the challenging operating conditions that we mentioned earlier. This offers an opportunity to add the largest healthcare stock on the ASX to your portfolio when prices are down.

Industry Analysis

The plasma industry is worth over $24bn and that number could nearly double by 2027, as global demand for plasma derived medicine rises by 6% to 8% each year.

There is a boom in private plasma centres across the US, with the number of centres tripling over the past 15 years and 2/3rd of these centres is owned by one of the three companies: CSL Plasma, Grifols, and BioLife. Plasma has been in high demand as antibody transfusions showing promising results in treating COVID-19 and private companies use plasma from COVID patients to develop potential drugs.

The global vaccine market has undergone a radical transformation in the last 12 months. Although it remains a relatively small part of the overall pharma market, in 20 years before 2020 it grew sixfold and was worth an estimated $3.5bn.

Allowing for the impact of the Covid-19 pandemic on the vaccine market, the forecasts say that the market value is to reach $57bn in 2025, expanding at a CAGR of 7.4% between 2020 and 2025.

CSL is well positioned to take advantage of both these industries.

Investment Thesis

In FY20, the company’s revenues went up by 7.2% to $8.8bn. CSL’s Behring’s revenue was at $7.6bn, up by 9% and Seqirus’s revenue grew by 11% to $1.2bn. The company witnessed a strong growth of 22% in immunoglobulin portfolio.

The strength in immunoglobulin revenue was due to strong demand for Privigen and Hizentra. Another contributing factor to the strong growth was the label claim granted to Privigen and Hizentra in the US for the treatment of chronic inflammatory demyelinating polyneuropathy (CIDP) in 2018. The revenue growth was also driven by the company’s seasonal influenza vaccines, with a significant increase in demand for FLAUD. Seqirus’ adjuvanted influenza vaccine for the elderly market.

In the latest earnings report announced by the firm, that is, H1 FY2021 CSL reported fairly positive results and the share price started to add some gains, which were later corrected given the Aussie Dollar’s performance. CSL’s immunoglobulin portfolio underpinned their performance during the half year period once again.

  • Behring segment revenues up 9%
  • Behring revenues increased across all geographical segments with APAC being the highest at 79%.
  • Seqirus segment revenue rose 38% as seasonal influenza vaccines increased 44% mainly in the USA and Europe.
  • The total group revenues increased by 15%
  • CSL maintained gross profit margins of 60.6% during H1 FY2021
  • CSL reported NPAT of US$1.8 billion – a 44% increase over pcp
  • With the EPS coming in at $3.98 a share, CSL announced an interim dividend of US$1.98 a share.

The strong performance has been due to initiatives that CSL has taken to combat the challenging operating conditions. In the Behring segment, the firm has managed to deliver:

  • Solid growth in the core immunoglobulin portfolio led by HIZENTRA
  • Successful transition to CSL’s own distribution model in China. This has enabled CSL to increase Albumin sales by 93% as hospital operations in China have returned to 90% of normal conditions.
  • Strong growth in the leading HAE product HAEGARDA

Despite the challenging operating environment, CSL has continued to find a way to increase its revenues and earnings. Our forecasted numbers suggest that revenues will continue to grow slowly in FY2022. Evidence suggests that successful rollout of vaccines in many parts of the world is not necessarily enough to eradicate the pandemic. Therefore, plasma donations will continue to experience headwinds in major markets such as the USA and UK.

FY2023 is when we reckon, we will once again start seeing growth in plasma donations. We are thus expecting revenue growth rates to be in the 4% range in FY2022 and then 11% in FY2023. EBITDA margins will be expected to remain more or less unchanged. The added benefits from the Covid19 vaccine rollout for CSL will be replaced by their plasma business back to operating at 100% capacity.

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The EPS growth for CSL has been fantastic over the past few years. It has grown by an average of 9%-10% year-on-year. We are expecting similar performances going forward. The high EPS growth also underpins the firm’s dividend policy. In H1 FY2021, given the strong Australian dollar performance in recent months amid soaring commodity prices and falling USD value amid increased stimulus measures introduced into the economy, the interim dividend of CSL has been affected by approximately 9% on conversion. This has been one of the most significant factors in the share price underperformance recently.

The outlook for USD is not robust. With stimulus cheques continuing to weaken the currency of global trade, Australian Dollar has been performing exceptionally well relatively. Strong commodity prices have underpinned this performance. The volatility arising from the forex market is expected to remain in the near term. However, it should not be a reason for long-term investors to stay away from the likes of CSL.

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The chart above shows that CSL has maintained a dividend payout ratio of around 42% over the past few years. For a company that continues to invest for growth, has several product candidates in its pipeline, and actively looks for M&A opportunities, it is an added advantage for shareholders. However, the main attraction of CSL will continue to remain in capital gains as EPS growth will underpin the share price performance in the long-term.

CSL’s balance sheet shows immense strength. Currently, CSL sits with a cash balance of $2.4 billion. The total debt on the balance sheet is $6.1 billion. However, with $17.6 billion worth of assets, CSL is covered in the long-term. CSL is also maintaining a current ratio of over 3x over the last couple of years. Quick ratio sits at 1.69x – suggesting that the company finds itself in no harm even under unforeseen circumstances.

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Valuation multiples based on the current market cap and the forecasted revenues and earnings suggest that CSL is trading at 41x its FY2021 P/E. However, the recovery to ‘normal’ as the pandemic eases means that this multiple is seen quickly reducing to 33.9x in just 2 years. There is a lot of growth that is being priced into the stock, however, the track record of CSL delivering 10% growth in EPS year-on-year should offer investors comfort.

Recommendation

CSL has been one of the best performing stocks on the ASX over the past 5 years. Their EPS has grown by 10% year-on-year. Increasing R&D investment is fuelling organic growth with several product candidates in its pipeline. Their plasma business is expected to rebound once the pandemic conditions are eased in the USA and Europe. Along with growth, investors can look forward to their dividends as well, which are fairly stable with a 40% payout ratio. We recommend long-term investors to “Buy” during this dip.

 

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