It’s Swine Flu Versus Talecris Trouble For CSL

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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

With swine flu reaching Australian shores the Federal Government has acted in lifting the alert level related to the virus to “contain”, meaning measures will be taken to limit the spread of the disease. The next phase is “sustain”, which would entail ensuring there were enough medicine available to sustain a response until a customised pandemic vaccine was available.

UBS analysts reiterate today moving to a higher alert level spells potential good news for CSL ((CSL)) as guidelines indicate all Australians should be available to get the vaccine and this means 21 million doses of the flu vaccine. UBS believes CSL is in line to get the majority of any new government vaccine orders and potentially as much as 90%.

While a normal flu vaccine is trivalent, meaning it addresses three strains of the flu virus, the broker notes a vaccine for swine flu would be single strain and this means it is likely to be cheaper in terms of manufacturing costs and costs to the government than the $10 per dose cost of a normal flu vaccine.

But as the broker points out, even at a lower cost the large number of doses the company is likely to be asked to supply means a significant impact on group revenues, potentially in the order of $100 million, with solid incremental margins. In an admittedly simple analysis the broker sees scope for a positive impact on net profit after tax in FY09 of 5-6%.

Even without this boost the broker has a base case valuation on the stock of $41 per share, which assumes no Talecris deal and $4 per share cash on the group’s balance sheet. Its price target of $43 reflects the upside of either the proposed acquisition of Talecris being approved or a share buyback if this is not the case, so a boost of 5-6% in net profit terms would only add further to this valuation assuming its pandemic vaccine numbers prove to be the case.

The broker remains a little above market consensus with respect to its numbers as in earnings per share terms it is forecasting 177c in FY09 and 228c in FY10. By way of comparison, the FNArena database shows consensus EPS estimates of 173.8c and 217.6c respectively.

The average price target according to the database is $41.42, this despite Deutsche Bank last week cutting its target to $32.00 from $39.15 given its view the regulatory concerns surrounding the proposed Talecris acquisition make a deal less likely to be approved.

At the same time as it cut its target the broker downgraded its rating on the stock to Hold from Buy, meaning the FNArena database now shows seven Buy ratings compared to just two Hold recommendations. Most of the brokers covering the stock see value at current levels but attribute recent share price weakness to uncertainty regarding the success of otherwise of the Talecris deal.

In an announcement to the Australian Stock Exchange, CSL reported this morning it had been informed the US Federal Trade Commission is likely to go to court in an attempt to block the proposed acquisition of Talecris. An official announcement could be made as early as Thursday, May 28.

Shares in CSL today are weaker and as at 12.10pm the stock was down 41c or 1.3% at $30.48, which compares to a range over the past year of $26.85-$41.97.

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