CSL Not Only About Talecris Potential

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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

One Australian company that hasn’t enjoyed the recent rally in equity markets is blood products group CSL ((CSL)), with Southern Cross Equities analyst Stuart Roberts suggesting market concerns over possible oversupply of IVIG and the regulatory outcome of the group’s proposed acquisition of Talecris in the US have combined to weigh on the share price.

This underperformance has been significant in Roberts’s view as he estimates the stock is now being priced on a post-Talecris P/E (price to earnings) multiple of around 14x in FY10, which is more indicative of a cyclical stock than the well managed growth company he considers CSL to be.

Roberts expects the Talecris acquisition will be approved by the middle of this year and assuming this is the case, the company should be able to generate synergies from the purchase of as much as US$225 million. The flip side is also good news for investors in his view as if the takeover proposal is rejected, Roberts sees a share buyback of up to $1.8 billion as likely. He estimates such a move could be as much as 6% accretive to earnings per share (EPS), even at a share price of $36.00.

Looking at the company’s core IVIG business there is reason for optimism as Roberts expects annual IVIG demand growth of around 7%. Given the market is pretty much in an equilibrium position at present, this supports his forecasts of EPS growth for the company of 23-33% through to 2011.

Oversupply in the IVIG market is not a major concern according to Roberts, as he points out there is no-one in the marketplace in a position to simply dump enough project to upset the market balance and inventories would need to be significantly higher to cause prices to collapse. The other point to note is IVIG demand is likely to grow given it appears likely to have a number of other uses, with it showing promise as Alzheimer’s Disease therapy and of use in dealing with diabetes.

Future upside is not all centred on Talecris as Roberts points out there is potential growth from entry into new markets and growth in royalties with Gardasil, while the company also has a number of other research and development projects that are currently in the early stages. As well, he notes, the company is an emerging player in the influenza vaccine market, where possible pandemics such as swine flu add to the potential for strong commercial returns in coming years.

UBS noted this as a point of potential upside as well in commenting on the company today, suggesting while the upcoming flu season in Australia was already likely to be a good one for the company, the swine flu outbreak has only underscored the stockbroker’s confidence in such an outcome.

Even if there was an adverse result in terms of the Talecris deal, Roberts suggests the strength of the company’s balance sheet, with around $1.9 billion in cash available pre-Talecris, or gearing of just 37% assuming the proposal is approved, means future growth via acquisitions will remain an option.

Another source of upside according to Roberts, comes from management’s moves to improve internal efficiencies, with its establishment of global centres of excellence an example of this. As well, he notes research and development is being focused on biologicals rather than small molecules as there are signs they can be better targeted as therapies and are also more defensible with respect to intellectual properties.

On Southern Cross Equities numbers the company should deliver EPS of 179.4c this year and 245.4c in FY10, which compares to consensus forecasts according to the FNArena database of 174.5c and 221.2c respectively. The broker’s Buy rating is supported by a price target of $42.00, which sits in the middle of its valuation range of $35.34 (base case) to $48.12 (optimistic case).

In contrast the average price target according to the FNArena database is $43.34, with Bank of America-Merrill Lynch the high marker at $48.80 and Citi the lowest with its $38.49 target. The stock is rated as Buy eight times and Hold once, this courtesy of GSJB Were.

Given analysts see upside if the Talecris deal is approved, such an outcome would seem likely to have a positive impact on the share price and so is a short-term catalyst for the stock as a decision is expected in the next couple of months.

Shares in CSL today are stronger in line with the broader market and as at 2.40pm the stock was up $1.24 or 3.7% at $34.44. This compares to a trading range over the past year of $26.85 to $43.19.

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