Worth Bottling

CSL Ltd (CSL) reported a normalised net profit of US$1.919 billion, up 13% on FY18 and slightly below Ord Minnett’s forecast of $1.925 billion. A final dividend of US$1.00 per share was declared, taking the full-year payout to US$1.85 per share.


Revenues matched our forecasts, although operating profit in both divisions fell nearly 5% short due to a weaker sales mix (that is, lower specialty sales) and faster cost growth. This was offset by a lower tax charge, reflecting geographical mix.


At a time when other fractionators are struggling to grow output and demand growth is running ahead of historical levels, CSL continues to gain share due in large part to its multi-year investment in plasma collections.


We make the following observations:


  • The tightness in the global market for immunoglobulin (Ig) has been confirmed by recent statements from the US Food and Drug Administration acknowledging a shortage. This raises the risk of rationing, although it also confirms the ongoing opportunity for CSL as the long investment lead times limit competitors’ ability to respond rapidly.


  • After a disrupted first-half, CSL delivered an impressive lift in albumin sales. This highlights both the robust demand in China and the company’s ability to manage its logistics to ensure appropriately licensed product is available. We expect albumin sales to continue to grow in line with Ig production, supported by direct distribution in China.


  • The weak FY19 sales reflected product-specific issues, most notably contracting Zemaira sales due to a production issue that has since been addressed. As these sales recover, and Kcentra and Haegarda sales also continue to lift, we expect specialty revenue growth of about 10%.


  • Operating margins were below expectations due to a more rapid lift in key expenses lines. However, this pressure should moderate in FY20, resulting in operating leverage. Sales and marketing costs in particular are expected to slow.


FY19 was not without its challenges, most notably weaker specialty therapy sales, although we are comfortable the group will continue to deliver solid double-digit earnings in FY20 and beyond. We believe this strong, consistent earnings growth profile warrants a premium, leading us to maintain our Accumulate recommendation, while our target price increases to $260 from $219 due largely to our decision to lower our risk-free rate to better reflect the global interest rate environment.

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