Australia | Aug 23 2012
– CSL delivers solid profit result
– Further increase in earnings expected in FY13
– Stock regarded as a core defensive holding
– Valuation the issue for some brokers
By Chris Shaw
Full year earnings for biopharmaceutical specialist CSL ((CSL)) of $982.6 million were broadly as the market had expected, the headline number helped by a lower tax rate during the period. The result demonstrated demand for CSL's products remains strong, particularly for immunoglobulins and specialty products such as Riastap and Berinert.
As Bell Potter notes, immunoglobulin sales for CSL grew by 15% in FY12, while strong Asian demand meant albumin sales increased by a similar percentage. The broker doesn't expect any slowing in demand growth for either product in FY13.
Even better was the 18% increase in sale of specialty products, which Bell Potter saw as a result of various product launches in the period and higher awareness of the various uses of CSL's products.
From such a base, Deutsche Bank expects another year of double digit profit growth for CSL in FY13. The market agrees, as consensus earnings per share (EPS) forecasts for CSL according to the FNArena database stand at 226c this year and 257.8c in FY14, which is up from the 189c achieved in FY12.
Earnings per share should receive a boost from management's intention to follow the current $900 million share buyback with another buyback of the same size. Longer-term JP Morgan suggests further capital management initiatives are likely given CSL's cash generating ability and the improvement in working capital achieved during FY12.
Revised earnings forecasts across the market have seen price targets for CSL push higher. The consensus price target according to the FNArena database now stands at $43.15, which is up from around $40.50 prior to the full year profit result.
Targets in the database range from RBS Australia at $38.23 to BA Merrill Lynch at $45.40, while Bell Potter's price target for CSL stands at $49.00. This is up from $36.00 prior to the profit result.
For some in the market, risk to earnings forecasts appears to be to the upside. As Bell Potter points out, CSL's core IVIG product could enjoy a significant boost in demand if it proves to be effective in the treatment of Alzheimer's Disease.
Competitor Baxter is currently preparing for a Phase III trial of IVIG in Alzheimer's and Bell Potter suggests success in this trial would generate benefits for all IVIG suppliers longer-term given the potential size of the market. Chances of success in the Phase II trial are seen as good.
Others are less positive, as BA Merrill Lynch suggests while FY13 should deliver peak earnings, by FY14 increased competition will add to earnings headwinds. This should be at least partially offset by new product launches in the view of BA-ML, but limits potential upside according to Credit Suisse and UBS.
Broker ratings for CSL continue to be weighted towards Neutral, the database showing five Hold ratings and three Buy recommendations. Bell Potter is not in the database but rates CSL as a Buy.
Among those with positive ratings, BA-ML remains attracted to ongoing consistent earnings growth from CSL, while JP Morgan sees the company as a classic defensive story that will continue to attract interest from investors.
Valuation is the main issue for those rating CSL as a Hold, Credit Suisse noting at current levels CSL is trading on a more than 50% premium to the ASX200 ex-financials index based on its revised earnings estimates.
Deutsche points out CSL is also trading at a large premium to international peers at current levels, this despite the likelihood of increased competition from late FY13 as Baxter rebuilds its output. Citi's view is CSL deserves to trade at a premium to peers given solid earnings growth but even allowing for this the stock is fair value around current levels.
Shares in CSL today are higher in a stronger overall market and as at 11.40am the stock was up 33c at $42.33. Over the past year CSL has traded in a range of $26.12 to $43.20, with the current share price implying upside of around 2% relative to the consensus price target in the FNArena database.
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