In a solid climate for Engineers & Contractors, Monadelphous’ FY26-27 growth potential stands out, supporting a seemingly rich valuation.

-Monadelphous’ FY25 result beats consensus
-Strong growth forecast for FY26-27
-Iron ore, oil & gas and renewables to drive growth
-Some analysts are predicting a new upgrade cycle coming

By Greg Peel

It was a positive August results season for the Engineering & Contracting sector servicing the resources industries. Macquarie highlights solid demand, earnings margin beats, strong balance sheets, with a number of share buybacks underway, and positive forecast earnings revisions for FY26-27.

A focus on revenue quality, improved terms & conditions and rational market behaviour is contributing to improved margins. A key theme for Macquarie is breadth of end-markets demand, featuring strong stay-in-business iron ore activity and renewables demand now arriving (transmission and electricity infrastructure). Domestic exposures are outperforming global.

For Citi, two Engineering & Contracting companies stand out from the pack; NRW Holdings ((NWH)) and Monadelphous ((MND)).

While Monadelphous’ recruitment activity is back above its historical monthly average, NRW’s job postings are still tracking below their long-term average, Citi notes. However, both enjoy robust order books and pipelines that are beginning to crystallise.

While skilled labour continues to be tight, Monadelphous and NRW have been successful in retaining their talent and continuing to build on their solid near-term top-line visibility. The industry is fast approaching an inflexion point, Citi believes, when it comes to large project awards which have been delayed for a myriad of reasons, such as cost pressures and regulatory headwinds.

For NRW, Citi believes positive momentum should continue but Monadelphous could be on the cards for potential step-change. Recruitment from here on will depend on large project awards and we could be entering a period of heightened hiring spree sooner rather than later.

FY25 Good

Monadelphous delivered a solid FY25 result, with earnings 4% ahead of consensus and profit 6% ahead. The stronger than expected result was driven by better than guided revenue growth. FY25 revenues increased by 12%, which was ahead of the company's guidance for high single-digit growth and consensus of 9%.

For the purpose of underlying numbers, Morgans has stripped out an earnings benefit from insurance proceeds in first half and left in the benefit from FX. This implies normalised earnings up 19% year on year. Earnings margins were strong, Morgans notes, at 6.71%, which is up 43 basis points on FY24.

Normalised profit was up 28%. The second half fully franked dividend was up 18% year on year, taking the full year dividend up 24%, with the company paying out 90% of profit as is customary.

FY26 Better

Looking into FY26, Monadelphous did not provide quantitative revenue growth guidance, but did speak to its confidence in delivering earnings growth in the year ahead. Analysts expect the company will provide formal guidance at the company’s AGM in November.

Monadelphous' outlook commentary points to a strong pipeline of committed work in FY26, with $2.7bn in contracts secured in the energy and resources sectors, along with significant prospects related to decarbonisation.

UBS forecasts FY26 revenue growth of 6% (up from 4% previously). Within this, UBS expects Monadelphous’ Engineering & Construction (E&C) business to deliver 9% growth (up from 5%), supported by recent awards in oil & gas and elevated commodity production levels.

The company’s Maintenance & Industrial (M&I) segment revenues should be supported by ongoing demand from the energy sector. UBS forecasts first half FY26 revenue growth of 13% given an increased oil & gas maintenance turnaround outlook. The broker highlights an increased workforce (up 25% versus the first half FY25), order book (up 22%) and book-to-bill (1.2x) as factors that support the growth outlook.

Monadelphous is more confident than normal regarding its outlook, Macquarie finds, noting it is "positioned for growth in FY26". Stay-in-business iron ore and oil & gas continue to be prospective, and the company is increasingly seeing work across renewables, as the long-awaited spending boom from the energy transition arrives.

M&I saw a second half rebound (revenues up 14% year on year) after a softer first half. Monadelphous expects a heavy turnaround schedule in the second half FY26, which should drive strong growth. Macquarie notes a number of recent contract awards across the energy sector (particularly in LNG).

The order book in E&C is around $570m to start FY26, which is $91m more than Morgans’ original estimate. Using history as a guide, this indicates E&C revenue for FY26 is likely to be between $1050-1170m, Morgans estimates, versus consensus beforehand of $956m.

Morgans sees risk as skewed to the upside, supported by Rio Tinto’s ((RIO)) Pilbara replacement program, with a catch-up in spend expected in the second half of 2025 and strong forecasted spend in 2026 and 2027. Monadelphous’ E&C revenue has historically had a strong correlation with Rio’s Pilbara capex spend.

The other positive takeaway for Morgans is we’re now seeing a revival of oil & gas construction work. Both Chevron’s Jansz-Io compression project and Woodside Energy’s ((WDS)) Pluto 1 modifications project are well underway, with the hook-up and commissioning of Shell’s Cruz platform recently awarded.

Oil & gas work is generally higher margin, Morgans points out, which means, subject to execution, Monadelphous has capacity to surprise to the upside on margins.

Industry conditions remain supportive, Jarden suggests, given strong demand and lessening headwinds from costs.

When assessing the potential outlook for earnings margins, Jarden is confident further accretion could be ahead given: 1) no major ramp-up costs expected for contract mobilisation in E&C works; 2) a commitment to continued earnings margin improvement from management, especially as it relates to labour productivity and on-site performance; and 3) management commentary that labour market conditions remain steady, albeit tight, with the lack of apparent volatility easier to price into contracts.

Too Rich, Surely

Monadelphous' shares have performed strongly this year, and were up around 50% year to date heading into the FY25 result. The combination of a sustainable double-digit earnings per share growth outlook, order book growth leveraged to domestic projects, and minimal global tariff exposure are factors that have supported the stock, UBS suggests.

That left the stock trading at a one-year forward PE of 24x, which is tracking to the upper end of its long-term trading range of 25x, reflecting the double-digit (and domestic) EPS growth outlook.

UBS sees the AGM in November as a potential positive catalyst, assuming the company is likely to provide first half revenue growth guidance, but for now UBS retains a Neutral rating.

Bell Potter also saw Monadelphous’ valuation as rich, heading into the FY25 release with a Sell rating.

Even with the material earnings forecast upgrades post the result, on a more optimistic FY26-27 outlook for E&C and M&I, Bell Potter continues to see a dislocation in fundamentals and sentiment, with the latter driving valuation multiples to prior cycle-peak levels, as UBS notes.

Bell Potter will wait to see if momentum builds for contract wins in the renewable energy generation, storage and transmission sector, which the broker believes is needed to complement rising demand for sustaining capital works, to offset a slowdown in greenfield project development across resources and energy.

On that basis, Bell Potter upgrades to Hold from Sell.

The upgrade cycle for Monadelphous is in full swing, Morgans acknowledges. Although the shares have re-rated materially, Morgans continues to like the stock given significant growth potential in both FY26 and FY27 driven by Rio’s multi-year iron ore replacement program (underpinning strong demand in E&C) and heightened oil & gas turnaround activity in FY26 and FY27 (increasing volumes in M&I).

Although the headline valuation looks stretched, it’s important to note Monadelphous reached circa $20 per share pre-covid in anticipation of Rio’s initial iron ore replacement program. Not only does Rio’s replacement program appear more significant this time around, the higher value M&I business is now 30% larger.

Material outperformance for Monadelphous was always going to hinge upon its ability to recapture pre-FY20 margins, Morgans suggests. The first and second halves of FY25 demonstrated the margin leverage in E&C, which looks set to continue, and positions the company well for an upgrade cycle.

Morgans upgrades to Buy from Accumulate.

While Monadelphous’ FY25 profit beat consensus by 6%, it met Macquarie’s forecast. Macquarie’s FY26 earnings per share forecast is now 9% above pre-result consensus, and the broker sees potential and catalysts regarding near-term contract awards and strong first half revenue guidance at the November AGM.

Macquarie retains Outperform.

Monadelphous’ decision to provide qualitative outlook commentary for FY26 at the full year result reinforces improving near-term topline revenue visibility and expectations of not only replenishment but growth in its order book balance, Citi suggests. As is always the case, there is a question around valuation and earnings yield, but Monadelphous could be in for an upgrade cycle starting on or even before the AGM in three months’ time, in Citi’s view.

On that basis, Citi applies a high valuation multiple to the stock, and post-result upgraded to Buy from Neutral.

That leaves three Buy or equivalent and two Hold ratings among the five brokers monitored daily by FNArena covering Monadelphous. Post the FY25 result, the consensus target has risen to $22.13 from $18.16.

Jarden maintains an Overweight rating and lifts its target price to $21.50 from $18.60 following: changes to earnings forecasts; a moderation in long-term capex forecasts in line with company commentary; and a change in Monadelphous' share price influencing Jarden’s capital structure assumption (remaining net cash).

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FNArena is proud about its track record and past achievements: Ten Years On

Sigma Healthcare’s transformational merger with Chemist Warehouse provides for strong growth in sales, earnings, synergies and store-count in FY26 and beyond.

-Sigma Healthcare’s FY25 sales boosted by Chemist Warehouse
-Store-count and synergies grow
-Management eyes four pillars for continued strong growth
-Valuation remains a sticky point

By Greg Peel

Leading pharmaceutical retailer Sigma Healthcare ((SIG)) has been around for 112 years in various guises, but arguably its most significant development was February’s merger with (reverse takeover by) the mighty Chemist Warehouse Group, adding to existing Amcal, Discount Drug Stores, Ultra Beauty and PriceSave chains.

This week Sigma reported its maiden FY25 result as a merged entity with Chemist Warehouse which represents a full twelve months’ contribution from Chemist Warehouse and four and a half months of Sigma.

Normalised earnings of $834.5m were slightly below consensus at $846m. Sales were up 82%, with highlights for Morgans including like-for-like store growth of 11.3% across the Chemist Warehouse network, total retail sales growth of 14% and a material increase in synergy benefits.

During the period, Sigma opened 35 stores (18 in Australia, 17 internationally).

The most important insight from the result for Macquarie was the business model metrics of the combined group, with a gross profit margin of 24.1%, cost of doing business representing 10.1% of revenue and a resultant earnings margin of 13.9%.

The group is highly cash generative, Macquarie notes, with operating cash flows in excess of $0.5bn and cash conversion of 83%.

Closing net debt of $752m was -$550m below Bell Potter’s expectation based on the guidance range in the merger documents. This has a material impact on FY26 earnings per share growth and overall equity valuation.

Looking Ahead

Sigma did not provide specific guidance for FY26 revenues or earnings.

Citi was encouraged double-digit like-for-like sales in the Chemist Warehouse network has continued into the first half FY26. The broker’s earlier work has shown Chemist Warehouse pricing is comparable to Amazon and around -13-14% cheaper than Coles Group ((COL)) and Woolworths Group ((WOW)) on a comparable product sample set.

This low-price positioning underpins further market share gains to drive sales, together with the high growth of the pharmaceutical category (GLP-1s, prescription medicines etc). Citi increases its FY26 Chemist Warehouse Australian Network like-for-like growth forecast to 10% from 8%.

Sigma’s earnings are expected to double between 2025-28 as the company exploits organic and international growth opportunities, Macquarie notes. Domestic store growth of 6%, new product developments in own or exclusive private label (less than 10% in FY25) and synergies through scale (now $100m, previously $60m) are important components of Sigma's "four pillars of growth".

Guidance for synergy cost-out savings were upgraded from $60m annually to $100m over four years with the majority of these to be realised in FY28/FY29. The key obstacle to faster capture of the synergies, notes Bell Potter, is the seamless consolidation of essential systems for ordering, warehousing and logistics. Each of the businesses has complex systems driving these functions. Their replacement and consolidation is timely and expensive.

Sigma’s marketing and media strategies are built around a highly visible media property, Macquarie notes. Chemist Warehouse will lead the market in implementing new strategies such as Chemist Warehouse partnering with Snapchat to promote its “Mayhem” sale using the app's new advertising format, First Snap (the target customers are Gen Z).

The outlook commentary paints a positive picture which sees Morgans forecasting earnings growth greater than 30% in FY26. Morgans has upgraded near-term forecasts modestly and increased like-for-like growth and updated synergy benefit forecasts.

Chemist Warehouse’s Australian store portfolio is significantly overweight Victoria, Citi notes, reflecting its formation. Should Chemist Warehouse’s store density (measured by population) in Victoria be matched in other states, we could see the Australian store network reaching around 830 over the next decade (300 more stores than in FY25).

New store opportunities should likely continue to emerge, Citi believes, as older, independent pharmacists retire from the industry. Over FY26-FY30, Citi forecasts an average of 25 net new stores per annum in Australia and 16 stores per annum in the international businesses.

Mixed Views

Sigma’s transformational agreement to merge with Chemist Warehouse created a leading healthcare wholesaler, distributor, and retail pharmacy franchisor, Morgans notes. This broker upgrades to Accumulate from Hold.

Morgan Stanley remains Overweight.

Strong companies demand premiums, Macquarie declares, but with Sigma trading on a FY26 PE of 48x, investors will be wondering just how "moaty" the business is. It would appear scale and cost advantage are the key to differentiation from rivals. These are hard to replicate. The unknown, insists Macquarie, is moat duration.

Sigma continues to deliver on its growth strategy, with a market-leading offer, and strong execution across the top-line and bottom-line. However, on that 48x, Macquarie sees valuation as stretched, and retains Underperform.

Earnings conviction will likely be key to calling the stock given the high multiple, Citi suggests. This broker waits to see a proper consensus post the financial year end adjustment to assess what’s built into market expectations before becoming more constructive, and retains a Neutral rating.

On Sigma’s much lower than expected net debt, and subsequent interest cost savings, Bell Potter upgrades to Hold from Sell.

Jarden is sticking with its Overweight rating and a price target of $3.40 (increased by 10c). This analyst sees this week's result as delivering more evidence why Sigma shares deserve to trade at a premium multiple.

Key characteristics highlighted are the retailer is highly cash-generative, it is growing market share, has significant operating leverage and a global growth story. To add to the thesis, the shares are seen trading at the lower end of its industrial peer set on PEG ratio.

Note: PEG Ratio is P/E divided by expected EPS growth (in %).

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FNArena is proud about its track record and past achievements: Ten Years On

Uncertain Behring growth, lower vaccine sales and a controversial restructuring plan led to a post-result share price drubbing. Is it all over for CSL?

-CSL's largely in line FY25 causes the share price to fall -19%
-Behring growth slowing, margin target abandoned
-Planned Seqirus demerger confounds, cost-cutting confusing
-Business is not 'broken' argue the Buy-raters, but challenges remain

By Greg Peel

Australia's largest biotech CSL ((CSL)) reported FY25 earnings on Tuesday and promptly lost -17% in value. Why? Ord Minnett sums it up best.

The FY25 results release from CSL proved a bitter pill for investors to swallow, Ord Minnett declares, as the many ingredients – revenue weakness in its key immunoglobulin (IG) market, ramped-up competition in the specialty products segment, US-led softness in its Seqirus vaccine division, a “confounding” plan to separate that business, and a sweeping restructure of R&D and broader business operating model to deliver targeted cost savings that Ord Minnett views as optimistic – spurred the market to erase almost a fifth of the company’s market capitalisation.

These factors, combined with the company walking away from its previous timeline of 3-5 years for a recovery in margins in the dominant Behring plasma products business have introduced a previously lacking degree of uncertainty and complexity into the earnings outlook and investment case for CSL.

Behring is the main engine room for CSL, representing over 70% of earnings, with a focus on rare and serious conditions like bleeding disorders, immunodeficiencies and neurological disorders.

Seqirus is largely a seasonal influenza vaccine business, but also produces vaccines for the likes of H5 avian flu. Seqirus accounts for around 10% of group earnings.

Thereafter comes Vifor, which is focused on iron deficiency and nephrology, along with CSL’s specialty products business, which, for example, recently received FDA approval for its Andembry injection (to prevent acute attacks in hereditary angioedema).

Despite what the share price shellacking might suggest, CSL’s FY25 results were broadly in line, featuring double-digit underlying earnings growth, solid operating leverage and strong operating cash flow.

Weaker growth in Behring (6%) was offset by solid growth for Vifor (14%), while Seqirus' performance was soft (-9%), despite being boosted by one-off avian flu contracts that will not recur in FY26.

As seen in the share price response, the market was not happy with the engine room (Behring) result.

Behring the Brunt

After strong first half IG growth of 15%, the second half nosedived, Jarden notes, delivering negative IG growth of -0.7%, bringing FY25 growth to 7% in constant currency. Stripping out the -US$100m Medicare Part D impact that had been flagged, second half growth would have been 2.8%.

What the US calls Medicare should not be confused with the Australian version. While Australia’s Medicare is a form of universal health insurance, US Medicare is specific insurance assistance for the elderly, while sister Medicaid is insurance for the poor.

The impact from changes to US Medicare part D cannot, believe it or not, be blamed on Trump. It was included in Biden’s Inflation Reduction Act, and lowers the threshold out-of-pocket payment level that patients must cover before a cap is triggered. In other words, lower revenues for pharma companies such as CSL.

Tender losses, however, caught Jarden off guard, impacting IG revenues from April 2025 as CSL gave up on low margin UK and Mexico tenders. Losing these tenders results in a -300-400bps impact to growth in FY26 as the revenue rebases for another nine months.

Yet, while Jarden (and everyone else) does not like to see CSL's core franchise slowing, the broker can sympathise with CSL not chasing lower priced contracts out of the UK, especially at a time when the US is contemplating Most Favoured Nation pricing.

MVN pricing is Trump’s attempt to blow up any nation’s equivalent of Australia’s Pharmaceutical Benefits Scheme that lowers drug prices when US equivalent prices are relatively huge, by imposing enormous tariffs yet to be confirmed.

The good news is UBS does not view Behring’s weak result as reflecting structurally higher competition from industry oversupply, noting CSL's expectations for medium-term IG sales growth are in line with competitors Grifols, Takeda and Haemonetics.

The bad news, however, and arguably a major driver of the negative share price reaction, is CSL’s abandonment of its long-standing guidance to a recovery in Behring gross margins to pre-covid levels of circa 57% by FY27-28.

In constant currency, the Behring’s second half gross margin of 50.3% was up 80bps year on year, Morgan Stanley notes, but down -140bps half on half. The combined impacts of additional staff costs, delays in new product launches and uptake and FX headwinds have resulted in the delay of previous gross margin targets, with management now providing no specified timeline, other than it is targeting year on year improvement.

If CSL is no longer confident, how can investors be confident? Brokers have pushed their own expectations of a return to pre-covid margins out to FY30, or FY29 at best.

Seqirus Fire Sale?

The most controversial announcement stemming from CSL’s result release was a planned demerger of the Seqirus business into a separate ASX-listed entity.

Ten years after the acquisition of Novartis’ flu vaccine business, CSL plans to demerge what became Seqirus by FY26-end. This came as a surprise, and for Citi the value creation for CSL shareholders isn’t straightforward – it will largely depend on the multiples the market applies to the two entities.

CSL sees a spin-off of the vaccine division as simplifying the overall company structure, arguing the vaccines business has a different focus to the Behring and Vifor operations. In Ord Minnett’s view, however, the separation plan does not stack up at this stage given CSL’s changes to its segment reporting mean there is limited visibility on just what Seqirus' operating earnings are.

In addition, valuing Seqirus in the absence of any comparable pure-play influenza stocks on global markets further muddies the strategic rationale for such a move.

Bell Potter finds the decision to demerge Seqirus operationally understandable, but unlikely drive near-term valuation uplift due to falling vaccination rates and a soft growth outlook.

The demerger is equally “somewhat puzzling” to Jarden given flu sales appear to be at a cyclical low point.

For that we can blame Trump’s anti-vax stance, driven by his bizarre Health Secretary RFK Jr. There was a lot of push-back across the US to mandatory covid vaccination, an attitude that has flowed into flu vaccination demand. Measles, once eradicated, is now at epidemic proportions in parts of the US, thanks to children not being vaccinated.

CSL points to low cost synergies between Seqirus and Behring, with a demerger enabling faster cost-out, capital allocation autonomy and better capitalisation of opportunity.

Morgans suggests a Seqirus demerger simplifies CSL’s portfolio, sharpens operational focus, and supports margin and return on invested capital improvement.

Cost Restructuring

A Seqirus demerger is part of a wider restructuring for CSL, which also involves streamlining R&D and commercial productivity, targeting US$500-550m pre-tax savings by year-end FY28.

The US$500m-plus in savings should help to underpin the delivery of double-digit earnings growth over the medium term, Morgans suggests.

A sticking point is the company then expects to reinvest half of the savings into the core businesses, eg via M&A or R&D. Given growing competition in some of its markets, Ord Minnett counters spending on sales and marketing to support revenue growth would be a better use of funds.

It remains unclear what the net savings will be from the US$500-plus annualised cost saving initiative, Bell Potter notes, as these savings are prior to flagged reinvestments, resulting in difficulty confidently forecasting earnings post FY26.

Jarden agrees, because the cost-out program came with the caveat of being partly available to source further growth initiatives, the quantum and format are not yet clear.

An announced A$750m buyback is welcomed, especially after the share price fall.

Value?

Back in mid-July, Morgans was at pains to suggest trading levels for CSL shares were significantly below fair value, pricing Australia's largest biotech as less than a single-division company, with the main Behring division alone justifying a higher valuation and with no value assigned to either Seqirus or Vifor.

Indeed, all of the seven brokers monitored daily by FNArena covering CSL had Buy or equivalent ratings.

Although a softer second half Behring result and “awkward” restructuring timing may unsettle investors, Morgans sees the growth engine intact, with cost savings reinforcing the path to sustained double-digit earnings growth. Morgans retains its Buy rating.

CSL's de-rating post the result reflects operating growth concerns following a disappointing Behring performance and greater focus on cost savings. This created an overreaction, UBS believes, to a modest compositional change in CSL's three-year earnings growth.

In particular, even after allowing for a smaller R&D premium, UBS believes CSL is undervalued in a status-quo operating environment. However, this broker also acknowledges it is hard to see a re-rating catalyst with confidence around Behring unlikely to return in the first half FY26 and ongoing earnings tail risk from MFN and US tariffs. Yet, UBS retains Buy, given it believes the de-rating is overdone.

Similarly, Macquarie sticks with Outperform, viewing Tuesday’s price movement as an overreaction. Incorporating more conservative FY26 forecasts compared to guidance, Macquarie sees the current valuation as undemanding, trading at PE of 20x with 10% earnings per share growth.

At a ten-year low PE, and a business that’s not “broken”, Citi equally sees value in the shares, and maintains Buy.

CSL's result highlighted weaker IG trends, with delays in gross margin recovery for Behring. Yet Mogan Stanley retains a positive medium to longer-term view, and an Overweight rating.

Breaking from the pack is Ord Minnett. This broker has downgraded to Hold from Buy given the earnings outlook and what the broker sees as the challenges facing the company.

Bell Potter is of a similar mind.

While the market reaction to the FY25 result and strategic review was severe, Bell Potter views the near-term outlook as challenging for CSL due to underlying earnings growth below market expectations, an underwhelming second half Behring performance, which has been the key pillar of growth for many years, delays to the assumed Behring margin recovery, and uncertainty around FY27-28 forecasts of the demerged entity at this time.

There were seven from seven Buy or equivalent ratings among those brokers last month and there’s now a remaining five, with two Holds. The consensus target amongst them is now down to $282.68 from $316.21.

Jarden also sticks with Overweight, although that is one rung down from Buy on Jarden’s five-tier system, with a target reduced to $298.13 from $313.12.

A less positive Wilsons had to make fewer adjustments as it was already positioned below the market. Wilsons believes this week's market update has put to rest a number of investment theses and assumptions that had to date supported the CSL share price. Even after this week's de-rating, CSL shares are still trading at a 30% premium to global Pharma peers, this broker notes.

Wilsons rates the shares as Market Weight with a price target of $227.50.

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FNArena is proud about its track record and past achievements: Ten Years On

Following a weak FY25, and weak FY26 guidance, Cochlear’s outlook rests on the success of its new Nexa implant and other products. Is the market too confident?

-Cochlear's FY25 and FY26 guidance underwhelm
-Cost of living impacts upgrade demand
-Launch of Nexa implant in the US critical to earnings growth
-Valuation and earnings risks dominate the debate among analysts

By Greg Peel

Despite Cochlear ((COH)) downgrading its FY25 underlying profit guidance to $390-400m in June, the actual result still came in at the bottom end of the guidance range at $391.6m, -2% below consensus.

Perhaps more surprising, Jarden suggests (and is not alone), were the unexpected one-off items that helped Cochlear reach guidance (just).

These items included: (i) a deferral of -$7.3m in cloud costs despite management increasing guidance around this spend in the first half; (ii) a $50m unwinding of staff bonus provisions (given growth targets were not met) and (iii) higher-than-anticipated "other income" from government grants.

Without these largely one-off items, Jarden believes Cochlear's result would have come in more than -10% below the bottom end of FY25 guidance.

FY25 revenue was in line with expectations. Stronger cochlear implant (CI) unit sales and better-than-expected Services growth were offset by negative geographic mix and lower Acoustics revenue. Gross margin declined -140bps year on year, -80bps below Macquarie’s expectations, driven by a negative mix-shift to CI and overhead recoveries at the new Chengdu facility in China.

FY26 underlying profit guidance has been set at a $435-460m, which represents 5-11% growth on a cloud-adjusted basis but still -3% below consensus, and notably includes a rebuild of the staff bonus provision that was reversed in FY25.

Revenue has become particularly unpredictable for FY26, Jarden suggests, given Cochlear's inability to market its latest innovation of focused multi-polar stimulation (Nexa) as it is yet to be approved by the US Federal Drug Administration (FDA). In the meantime, the acceptance of the latest implant will rest on the upgradeable chip which essentially future-proofs the device.

This is a compelling proposition for patients, Jarden believes, but Cochlear recognises its success will ramp up over time as FY26 guidance relies on earnings that will be back-weighted to the second half, following new product launches in the first half, increasing the risk of another earnings miss come August next year.

All Rests on Nexa

Cochlear Implants gained in FY25 on the launch of the new Nucleus Nexa system in Europe and Asia-Pacific, with FDA approval pending, although developed market growth slowed. Services fell on waning Nucleus 8 sound processor upgrades, which is blamed on the cost of living, while Acoustics surprised to the upside.

Cochlear will launch its new Nexa implant, and new sound processors, including the Kanso 3 off-the-ear processor, in the US market by September end. While some US patients are delaying upgrading their sound processor, which is discretionary in the near-term, they will inevitably upgrade over time, Citi believes, as the processors eventually break.

The payments plans put in place by Cochlear have not been enough to reverse the trend. Citi expects the launch of Kanso 3, the growth in eligible recipients, and the retirement of the Nucleus 7 will drive upgrade growth in FY26.

UBS sees new product releases supporting higher-than-expected earnings growth over the medium-term. UBS thinks Cochlear's next generation CI portfolio should boost its global market share and lift three-year CI revenue growth to 10% per annum.

UBS also expects Services revenue to lift by 50% over the next four years, underpinned by CI installed base unit growth of 36% and a recovery in sound processor replacement rate, helped by upgrades to the new Kanso 3 processor.

Citi agrees, suggesting the launch of the Nexa CI and associated sound processors should allow Cochlear to win market share in implants over the next few years after a stabilisation in FY25 (in which Cochlear’s market share was greater than 60%).

Cost of living pressures in the US have delayed the upgrades of new sound processors in FY25, but Citi believes the launch of the new Kanso 3 by September end will help drive growth again.

Not All Are Convinced

While Nexa’s US launch should support CI demand through FY26, Morgans cautions against assuming uplift similar to prior product transitions, as Nexa is aimed at workflow efficiency and patient convenience rather than a step-change in hearing performance, so more of an “evolutionary” not “revolutionary” refinement that may take time to translate into material volume or margin gains.

While management’s FY26 CI growth target of 10%-plus looks reasonable, Morgans remains cautious on market expectations for a repeat of the mid-double-digit growth seen in prior product cycles.

While acknowledging the technological advancements of Nucleus Nexa, Macquarie remains cautious on the near-term outlook.

Management highlighted ongoing uncertainty in Services revenue (upgrades) due to out-of-pocket payments and cost of living pressures, while margins are expected to be impacted by volume-based pricing in China and the rebuild of bonus provisions in FY26.

Further, first half FY26 CI revenue may be impacted by delayed surgeries in the lead-up to Nexa’s US launch, Macquarie warns.

The encouraging aspects for Wilsons of the second half FY25 were: a) three Services downgrades over the last year have “done the work” in resetting reliable expectations; b) fundamental device demand across both CI and Acoustics look as strong as Wilsons has ever seen them; and c) as “cool” as Nexa’s “smart” features and peripherals are, the broker sees the new implant as a compelling development.

If that proves true, Wilsons believes Nexa will take more CI share than the market currently has in its models. Having seen nothing sinister in recent Services misses and with a Nexa launch imminent, this broker has removed the -15% discount it had been applying to valuation.

However, on earnings, Wilsons could not develop conviction above the bottom end of guidance. The risk of further misses and/or downgrades keeps the broker on the sidelines.

Mixed Views

Citi expects Cochlear’s new product launches in the first half FY26 to fuel growth in in the second half and beyond. UBS sees CI market growth, CI share gains and a recovery in Services. Both retain Buy ratings on Cochlear, but among the eight brokers cited in this report, these are the only Buy or equivalent ratings.

While noting the technological benefits of the Nexa system, Macquarie sees Cochlear's current share price as fair, with near-term downside risk from Services revenue and negative geographic mix. Macquarie retains Neutral.

Ord Minnett is wary of how constrained US consumers will affect Cochlear’s Services revenue, but suggests the end-of-life of its N7 processor towards the end of this calendar year should boost upgrades in the second half of FY26.

Ord Minnett maintains a Hold recommendation. The company possesses investment attractions, the broker notes, eg an oligopolistic market dominated by Cochlear, a large addressable market, and technological advantages, but these are already priced into the stock.

While new CI system launches tend to precede re-rates, Morgans remains cautious, given an out-of-cycle launch and user-focused enhancements increasing reimbursement risk. Morgans has downgraded Cochlear to its new inter-tier rating of Trim from a prior Hold.

To justify Cochlear’s current share price, Morgan Stanley estimates CI unit sales would need to increase by some 13.5% pa, which implies a market share of around 90% by FY35. The conclusion is the current share price implies substantial long-term share gains and/or limited competitive response, hence an Underweight rating is retained.

That equates to two Buy or equivalent, two Hold and two Sell ratings among the six brokers monitored daily by FNArena covering Cochlear. The consensus target price among them has risen to $311.74 from $290.98, on a range from $280 (Morgan Stanley) to $350 (UBS).

As noted, the risk of further misses and/or downgrades keeps Wilsons on the sidelines, with a Market Weight rating, albeit the removal of Wilsons’ -15% valuation discount leads to a target increase to $330 from $286.

Jarden also declares itself to be on the sidelines. The market seems willing to give Cochlear the benefit of the doubt at this point, Jarden suggests, despite earnings uncertainty. The stock remains expensive, carrying earnings risk despite the promise of earnings growth in FY27 - based largely on the success of the Nexa implant.

Jarden retains Neutral, lifting its target to $278.51 from $270.28.

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Telstra is guiding to subdued mobile growth in FY26 as the cost of living bites. Earnings growth relies on cost cutting and satellite development.

-Telstra’s FY25 in line, FY26 prognosis subdued
-Cost of living driving customers to cheaper options
-Major staff reductions to drive cost-outs
-Satellite service critical to maintaining dominance

By Greg Peel

Telstra Group ((TLS)) reported underlying FY25 earnings of $8.6bn, up 5% year on year, in line with consensus. The 9.5cps dividend was also as expected. A $1bn share buyback was announced.

Telstra's mobile result was soft in a softer market, analysts agree, with Postpaid in particular affected by several one-off drivers. On an underlying basis, Postpaid net adds were 106k, implying churn of 11.8%. With an additional two months of price rises ahead, mobile services revenue has tailwinds in FY26, Macquarie suggests.

Prepaid net adds were softer at -223k on an underlying basis, driven by the significant Prepaid price rises in FY25. Macquarie is mindful of the broader market-wide mix-shift to Prepaid and MVNO post-covid, but rational MNO pricing is a positive and MVNO price rises are starting to come through, with ALDI a key example.

Glossary time…MNO = mobile network operator, of which Telstra is one, along with Optus and Vodafone. MVNO = mobile virtual network operator; a mobile provider that leases phone and data services from network providers, rather than building and supplying the networks themselves, thus able to offer cheaper prices. And yes, ALDI is the supermarket chain, now also an MVNO.

Cost of Living

Mobile delivered 61% of group earnings in the second half FY25 and its momentum has slowed. In FY25, Mobile revenue lifted 2.7% year on year (4.5% in FY24) while underlying earnings lifted 4.7% (9.2% in FY24). Post-paid mobile subscribers declined -0.6% or -104k. However, 161k post-paid subs were either reclassified or removed due to the closure of legacy systems and Telstra’s 3G network. If we add 161k to second half subs, Morgans notes, this implies 1.2% year on year growth in post-paid subscribers.

Recent updates have seen weaker postpaid service in operation (SIO) growth relative to expectations for all carriers, Jarden points out. Conversely, prepaid (TPG Telecom ((TPG))) and Wholesale (Telstra) have both seen strong growth, suggesting “spin-down” (to cheaper options) remains persistent.

At the industry level, the share of prepaid SIOs including wholesale (MVNO) has increased from 34% as at December 2021 to 40% as at June 2025. The last four halves have been soft in postpaid, with only 154k services added at the industry level, versus 1,249k net new prepaid/wholesale services.

In Jarden’s view, this is strong evidence that as cost-of-living pressures have built up, consumers have been switching to cheaper prepaid/wholesale plans.

AI Impact Upon Us

Telstra has set some ambitious targets for FY30, Ord Minnett notes. Around $10bn in operating earnings, more than $20bn of balance sheet headroom, some of which will be used to fund capital management initiatives, a compound annual growth rate (CAGR) in the mid single-digits for cash earnings, increased dividends, and return on invested capital of at least 10%. The telco is on schedule to hit them, in Ord Minnett’s view.

Assuming mobile earnings growth in the mid single-digits and a broadly neutral contribution from its other divisions, further cost savings will be the key to getting there.

Despite mobile weakness relative to expectations, Telstra’s cost-out progress continues. Macquarie estimates the 550 full-time equivalent positions reduced in May will provide more than $70m of opex tailwinds in FY26, with an additional $380m of cost-out from the sale of 75% of service provider Versent to Infosys in FY26.

The cost savings required will primarily come from significant cuts in staff numbers –-Ord Minnett estimates circa -20% of current headcount of 31,000 full-time equivalent employees will be necessary-– as AI developments come to the fore and reduce the need for human involvement in many processes and transactions.

Telstra’s peers in the UK and US have already flagged reductions of similar or larger scale to their own workforces.

That’s -6200 employees made redundant by bots. Be warned.

Reach for the Stars

Mobile is the largest part of Morgan Stanley’s Telstra valuation and the key driver of shareholder value, plus it supports the ability to pay a rising dividend. The valuation is justified for the leading Mobile network, Morgan Stanley believes, a clear number one in post-paid subscribers (50% share); Mobile average revenue per user which is $10-20/pm premium to peers; and 50% earnings margins.

But to keep this premium valuation, it is essential Telstra maintains clear leadership, which is why what happens with upcoming new satellite services is critical. In Morgan Stanley’s view, if Telstra can launch and build a similarly dominant position in satellite, it will entrench its leadership in Mobile connectivity and underpin continuing high returns.

On the other hand, failure to execute, or if a competitor takes satellite leadership, then Morgan Stanley envisages the shares will be de-rated.

Based on industry discussions and channel checks, Morgan Stanley considers the following factors as important and in Telstra's favour:

-Largest mobile spectrum holdings in the right bands. Which are necessary to augment the low earth orbit (LEO) satellite reach to mobile services

-Existing relationship with largest LEO satellite operator – Elon Musk’s Starlink

-Largest Mobile and Broadband customer base in Australia

-Largest fibre network and digital infrastructure assets in Australia

-Strong balance sheet with capacity to invest additional funds in further infrastructure if necessary.

One issue is that Morgan Stanley does not believe Telstra has an exclusive partnership with Starlink. It is not unfathomable that one of Telstra's main competitors secures a superior deal with Starlink (or another LEO operator), and leverages that to disrupt Telstra’s current leading market position in Mobile overall.

Fair Value?

Of Telstra’s balance sheet headroom, Ord Minnett estimates at least circa $5bn will be available for capital management in the years out to FY30. Telstra’s dividend franking ability will likely soon be constrained, and consequently the company has indicated it will prefer share buybacks over special dividends.

Ord Minnett maintains its Accumulate recommendation.

Macquarie is wary of a subdued mobile market, and mix-shift to MVNO and Prepaid, but is looking through the one-off impacts in FY25. On rational MNO pricing and strong cost-out tailwinds, plus intercity fibre network earnings, Macquarie gives Telstra credit for a mid single-digit cash earnings CAGR and maintains Outperform.

Morgan Stanley retains its Overweight rating, noting Telstra is a quality, defensive stock. FY25's performance was in-line, and FY26 has been tweaked lower, but supportive of the broker’s positive thesis is Mobile and InfraCo growth driving surplus free cash flow, lifting dividends.

Morgans sees Telstra as "expensive" relative to fundamental value but acknowledges the telco's defensive earnings stream, reasonable earnings certainty and management targets to “grow cash earnings by mid-single digit CAGR to FY30” appeal to some.

Morgans sticks with Hold.

UBS similarly retains Neutral, as mobile growth is likely to be subdued into the first half and could lead to minor FY26 consensus downgrades. Telstra is trading in line with UBS’ fair value estimate and enterprise value to earnings of 8x, in line with its five-year average.

Bell Potter has increased the multiple it applies in its PE ratio valuation from 23x to 24x and also the multiple applied to the Mobile business in the sum-of-the-parts from 7.5x to 8x. The net result is a 2% increase which is a modest discount to the share price, so Bell Potter maintains a Hold recommendation.

That leaves a split of three Buy or equivalent and three Hold ratings among the six brokers monitored daily by FNArena covering Telstra. The consensus target price has negligibly ticked up to $4.87 from $4.86.

Wholesale pricing remains key to both growing earnings and limiting spin-down from postpaid, Jarden suggests. At the market level, SIO growth has been subdued, with just 196k total mobile SIOs added in the six months to June.

Despite the softer outlook, Jarden remains buoyed by management's ongoing efforts to simplify the portfolio (Versent proposed sale and the international review) and return excess capital to shareholders ($1bn additional buyback).

Even so, Jarden lowers its rating to Neutral from Overweight, and its target to $4.80 from $4.90.

Updated consensus forecasts, derived from the six daily monitored brokers, anticipate dividend increases at a slightly slower pace than earnings per share in the years ahead. Annual payouts to shareholders are projected to increase to 20c in FY26 and to 21c in FY26.

See Stock Analysis on the website for more details.

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