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Date : 16/08/2023

CSL

ASX :

CSL

Market Cap : $131.59 Billion

Dividend Per Share : $3.59

Dividend Yield : 1.32 %

Buy

52 Week Range : $255.87 - $314.28

Share Price : $272.07

CSL continues to see steady growth, with the Vifor acquisition a big boost. We recommend a "BUY".

Company Analysis

CSL Limited (ASX: CSL) released its FY23 results this week. Revenue increased by an impressive 26%, with all business units firing strongly. NPAT came in at US$2.19 billion, up 8%.

The company uses NPATA as their key performance measure, which is statutory net profit after tax but before amortisation and impairment of acquired IP, acquisition and integration costs and any unwinding of inventory fair value uplift.

Constant currency NPATA came in at US$2.86 billion, exceeding the guidance range of US$2.7-2.8 billion. Underlying NPATA was up 10% to US$2.61 billion and exceeded guidance of US$2.55 billion.

CSL noted that the operating environment was tough, with increased competition leading to declining sales for some products. Additionally, inflation and currency movements significantly impacted, with currency movements alone costing ~US$245 million.

Our previous coverage of CSL can be found here.

Highlights from the FY23 results include:

  • Revenue up 26% to US$13.31 billion, up 31% on a constant currency basis
  • NPAT up 8% to US$2.19 billion
  • NPATA up 10% to US$2.61 billion, up 20% on a constant currency basis
  • Gross margin 54.5%
  • Operating profit up 21% to US$5.796 billion, up 27% on a constant currency basis
  • Full-year dividend up 6% to US$2.36, up 13% on an AUD basis to $3.59
  • NPATA EPS up 6% to US$5.41
  • ROIC 12.2%, down from 18.1%

The final dividend of US129 cents will be paid on the 4th of October, 2023. The ex-dividend date is the 11th of September, 2023. Based on the price of $272.80, the full-year dividend of $3.59 in AUD terms represents a yield of 1.32%. The dividend only attracts 10% of the full 30% franking credit. So there is a 3% franking attached.

Growth Continues

CSL continues to keep a steady focus on growth opportunities. During the year, a major contributor to the growth in results was 11 months of ownership of CSL Vifor.

The Vifor acquisition complements the existing business units, adding strong commercialisation expertise in iron deficiency and nephrology therapies. The group focuses on partnering with existing pharmaceutical companies to help them with licensing, product development, manufacturing and marketing.

The new division contributed US$1.957 billion in revenue, boosting the topline substantially. The existing business units grew by a combined 11%, which is still impressive, given the business scale. It also added US$1.411 billion to the gross profit. The following table summarises the result by division.

Source: CSL Results Presentation FY2023

Seqirus is a global leader in the influenza vaccine market. The post-pandemic normalisation has seen more people getting the flu vaccine again. While this business should deliver solid, consistent growth – pandemics aside – it is unlikely to see anything explosive. It’s a slow-burning consistent growth engine.

Behring has been the main growth driver for CSL. It turns donors’ plasma into life-saving therapeutics, particularly immunoglobin products. The treatments offered are broad and cover many rare and serious diseases, such as haemophilia, von Willebrand disease, immune deficiencies, inherited respiratory disease, chronic inflammatory demyelinating polyneuropathy, and hereditary angioedema.

This segment also researches plasma and non-plasma therapies and receives license fees and royalties from commercialising intellectual property.

Some of the current research aims are to reduce the recurrence risk of a heart attack in the subsequent 90-day high-risk period and reduce kidney transplant rejection.

CSL has an expansive array of products in development at various stages. Some will see revenue during FY24. Some are in phase III trials, while others are far less advanced.

This is a large organic growth pipeline that will be continually flowing through.

The Vifor acquisition is a very interesting play. CSL hasn’t been too prescriptive about how they will grow the business. However, there is a big and obvious opportunity. There are two distinct and completely different business modes for pharmaceutical companies. Research and development is one. Commercialisation is the other.

The skills, business structure and capital requirements are completely different for these two modes of operation. That’s why many amazing products fail when it comes to commercialisation. The business involved underestimates what is required to bring the product to market.

Otherwise, they partner up and sell out too cheap, giving away most of the value. CSL may be seeing Vifor as the opportunity to be the Amazon of the pharmaceutical commercialisation space.

Let me explain.

Where do you go if you write a book and want to sell it quickly and cheaply to your small Indy fan base? You can spend years sending manuscripts and emails to publishing houses all around the world, with a high likelihood that you’ll still be rejected at the end of the day.

John Kennedy Toole famously took his own life out of despair when he couldn’t get his book published. It took his mother more than ten years and many rejections to finally get her son’s novel published. Without her tenacity, it may have never seen the ink of a printing press. His novel – A Confederacy of Dunces – is now widely known as a great piece of American literature.

These days, if you have a burning passion for publishing a book, you can self-publish through Amazon. And far from needing a masterpiece, just about anything can get published there. Amazon made the road to publication quick and easy.

They did the same thing for anyone wanting to sell anything. You can go on Amazon to buy books – of course – but also car parts and rubber ducks. You don’t need a storefront or salespeople. Amazon does it all for you.

Imagine that for pharmaceutical companies. OK, so maybe not quite as simple as the Amazon process. However, there is room to create the go-to commercialisation partner channel for pharmaceutical companies. While Vifor has a niche focus with its activities, there is room to take the learnings and open it up to the pharmaceutical market more broadly.

It’s a massive opportunity.

Other Metrics

There are a couple of other metrics worth highlighting.

First, CSL is incredibly effective at inventory management. Not an easy thing to pull off in the recent pandemic disrupted period, but inventory levels have been consistently about 40% of revenue over a long time. See the following table.

Source: CSL Results Presentation FY2023

The company’s ability to maintain inventory levels during changing market conditions and rapid growth is a big advantage. Many businesses suffer large write-downs due to inventory mismanagement. This should leave CSL holders sleeping a little easier at night, knowing this particular risk is one they’ve excelled at managing thus far.

Second, capex is shifting from a growth spend phase to a maintenance phase. FY24 capex is expected to be down by 30% on FY23. If this trend continues, we may see better flow through of increased revenue to bottom line NPAT in the coming years. Of course, the large capex budget and resultant high amortisation is one of the reasons that CSL prefers NPATA over NPAT.

Source: CSL Results Presentation FY2023

Outlook

CSL provided guidance for FY24 with 9-11% revenue growth and underlying profit to grow 13-17% to US$2.9-$3.0 billion.

There are several positives to watch for. Record plasma collections in FY23 sets up Behring for a strong year. The gene therapy product HEMGENIX® is being launched in the US and EU. There are also margin control initiatives underway to improve gross profit.

CSL continues to invest in new plasma collection centres, with 12 opened during FY23. A new plasma donor app has been rolled out, and a marketing campaign is underway to drive donation growth.

For Vifor, we can look forward to further integration benefits. We should see costs cut from the business and margins improve.

Sequirus has secured a deal for access to next-generation mRNA technology.

The company has already addressed the impact of inflation on the business. While this may continue to create some drag, it’s unlikely to be significant, given they have fairly price inelastic products. This business should be fairly resilient to high inflation, a bit of short-term volatility in earnings aside.

Growth is likely to continue in the same steady fashion. While many growth opportunities are underway, this is already a substantially large organisation with fairly steady, predictable growth. It’s what attracts many investors to this great company.

Recommendation

CSL is one of the highest quality businesses on the ASX. The Vifor acquisition gives them an instant boost in revenue and profit. It’s a step change for sure. But organic growth is much more modest, though still impressive.

CSL is a safe and high-growth play. For that reason, it’s one of the most coveted stocks on the ASX. It’s no hidden secret.

And that’s the only problem.

The market knows about them, and they are priced with a premium for growth and defensiveness. If you want to get in, you have to pay up. That can feel daunting, especially as interest rates are climbing and valuations are falling across the market.

The current market cap is US$82.53 billion. Based on NPAT of US$2.19 billion, FY23 PE is 37.7. Assuming the FY23 ratio of NPAT to NPATA of 0.84, the FY24 NPATA guidance of US$2.9- 3.0 billion for FY24 indicates a NPAT of roughly US$2.48 billion. That results in a forward FY24 PE of roughly 33.3.

On the surface, it looks expensive.

But CSL has traded in a PE range of 33-45 in recent years. We see it continuing to deliver consistent growth, making the current valuations a decent long-term entry point. The following chart shows the 10-year history of CSL’s PE ratio.

We upgrade our current rating of CSL Ltd to a “BUY”.

CSL historical PE (Source: Finbox)

Technical Update

The CSL share price had a strong rally into the start of the pandemic but has been trading in a wide sideways band since then. The top of the channel sits at about $318, and the low is close to $243.

There was an upward sloping support holding up price, which recently broke. It is shown by the orange line in the following weekly price chart. Price has formed a consolidation since then and is paying attention to the minor level at $263.

Short-term price will be bullish if it can retake and hold $274.80. Otherwise, there are lingering bearish overtones. Major dips below $255 are expected to be short-lived, as this is historically very good value buying.

Source: TradingView / Shares in Value

 

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