Australia | Jun 22 2006
By Chris Shaw
The decision by CSL (CSL) management to bring forward a contingency payment of US$250m relating to the acquisition of Aventis Behring a few years ago suggests confidence in the company earnings outlook, a view shared by a number of brokers in the Australian market.
ABN Amro is one to remain positive on the stock, rating it as a Buy with a price target of $65.00. Its confidence has been reinforced following a survey of IVIG pricing (blood plasma) in the US market, which shows contract prices have risen on average 7.3% since January, with CSL experiencing an average increase of 5.5%. Spot prices are on average 10-15% higher than contract prices.
The price increase reflects growth in the IVIG market thanks to both strong demand stemming from an increase in the number of indicators for which it can be used, as well as the fact in the US market the Centre for Medicare and Medicaid (CMS) reimburses some of the cost of the product.
While the survey is positive for sentiment the broker has not lifted its earnings forecasts, as it notes the US accounts for only 40% of the company’s IVIG revenues and prices in that market are about 10% higher than in Europe and the rest of the world. It points out though there is upside to its valuation on the stock from the strength in IVIG prices, as for each US$1 increase year-on-year its DCF valuation increases by about 87c. The broker’s current valuation is $65.00.
The broker is also positive with respect to management’s decision to bring forward the contingency payment, as it points out the payment is based on the share price remaining above levels of $28.00 and $35.00 for a number of consecutive trading days, an outcome that looks almost certain to be achieved.
While the payment will see reported earnings fall this year, the broker notes there is no change to its normalised profit forecast. JP Morgan has also not changed its profit forecast for this year, noting its estimate of $348m remains within management’s reaffirmed guidance of $335-$350m. It too suggests the bringing forward of the payment is a vote of confidence in the company’s earnings outlook.
The broker rates the stock as Overweight with a target of $68.00, suggesting on a forecast FY07 P/E ratio of 21.9x the stock is cheap at current levels. On its estimates the company should generate EPS growth of about 20% annually for the next four years, while even a halving of royalties from its HPV vaccine would see EPS growth of about 15% annually in that period.
UBS has a lower price target of $62.10, but also is positive on the stock and rates it as Buy 2. The broker recently attended the Plasma Jamboree 2006, where it notes industry feedback suggested an ongoing positive pricing environment for both IVIG and Albumin.
It too is positive on the bringing forward of the contingency payment, as it notes the payment will address the problem of a somewhat lazy balance sheet while also dealing with the inability to identify an appropriate way to make a capital return to shareholders.
The FN Arena database shows the market is broadly positive on the stock as it is rated as Buy by six brokers and equity researchers, compared to three Hold ratings. The average share price target is $62.20, which compares to a last closing price of $50.90.