CSL Result Good, Proposed Acquisition Even Better

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This story features CSL LIMITED.
For more info SHARE ANALYSIS: CSL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Even allowing for foreign exchange headwinds of almost $80 million, blood plasma group CSL ((CSL)) delivered an FY08 result in line with market expectations, its net profit for the year growing by 30% to $702 million. Further growth is expected in FY09, with management guiding to earnings in a range of $810-$850 million.

In ABN Amro’s view the profit result was a strong one given the forex headwinds, and the guidance for next year sees the broker lift its earnings estimates by around 4%, while JP Morgan expects next year’s result to be even better than expected and is forecasting a profit of around $880m.

But even more than the earnings result and outlook for next year the market is focussed on the group’s proposed acquisition of Talecris, which Deutsche Bank notes would push the company to a global leadership position in the plasma market while offering scale benefits and scope for cost cutting opportunities.

While the earnings benefit of the deal won’t become apparent until FY10, Deutsche estimates it will be around 10% accretive in that year, with risk to the upside as synergy benefits could quite easily be greater than management has estimated, according to the broker’s analysis.

The only issue here is the possible need to sell some assets to meet regulatory issues, so the broker has chosen not to adjust its earnings until it sees how the deal shakes out. But it’s unlikely regulatory issues could scupper the deal, which the broker estimates would cost the company around 14c per share in earnings in a one-off charge.

Macquarie expects the proposed acquisition will satisfy the regulatory authorities and sees the deal going ahead, meaning CSL will in a couple of years time be better able to control plasma supplies in the global market. Add in the synergy benefits and the broker has gone as far as upgrading the stock to Outperform from Neutral.

UBS is similarly positive on the acquisition as it notes the deal would give the company almost half of the US IVIG market and 32% of the US blood plasma market overall, thus strengthening its competitive position. While not adjusting its forecasts yet, as the deal has yet to go through, the broker sees significant upside if it is successful.

Post the result consensus earnings estimates for the stock according to the FNArena database stand at 155.7c in FY09, which compares to the FY08 outcome of 127c in normalised terms.

Given earnings growth should be solid even if the deal does not proceed, it is little surprise broker price targets have been increased post the result, though the Talecris acquisition accounts for much of the upside. The FNArena database shows an average price target now of $43.87, which compares to $41.14 prior to the profit result and acquisition announcement. Thomson One Analytics shows a median price target of $40.75.

Leading the way is JP Morgan with a target of $50.02, while Citi has the lowest target among brokers to update post the result at $38.81. It is also the only broker to downgrade its rating post the result, moving to Hold from Buy on valuation grounds given recent gains in the share price. Overall the FNArena database shows the stock is rated as Buy seven times and Hold three times.

Shares in CSL today are not trading as the company is to have an equity issue to help fund the cost of the Talecris acquisition, but closed yesterday at $39.00.

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