Low AUD A Positive Injection For Aussie Healthcare

This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL

– Falling AUD healthy for Aus Healthcare stocks
– Brokers see steady rates as low as 0.96 near-term
– CSL and ResMed to benefit most
– Hedging limits upside for some

By Andrew Nelson

One Australian industry sector that is already enjoying the recent weakness in the AUD, at least in terms of positive forecast revisions, is Healthcare. Over the past week or so, half of the brokers under FNArena coverage have revised their forecasts for the sector, leading to higher earnings and price targets for a number of stocks.

A good number of stocks in the sector generate sales around the world and undertake some significant reporting in US dollar terms. Thus, the downward pressure on the AUD is having some meaningful influence over a number of domestic healthcare stocks.

JP Morgan’s FX Strategy team last week lowered its AUD/USD expectations. The broker now expects the AUD/USD will peak at US$1.01 in March 2014 compared to previous expectation for a peak at 1.07 in December this year. This combined with updated valuation assumptions to reflect a lower risk free rate has generated earnings and valuation changes across the sector.

The broker’s main focus is on four stocks, CSL ((CSL)), Cochlear ((COH)), ResMed ((RMD)) and Sonic Healthcare ((SHL)).

JP Morgan sees CSL as being one of the major beneficiaries of recent currency movements given the company reports earnings in US dollars. There were only minor upward revisions to FY13 forecasts, but FY14 EPS is up 3% and FY15 is up 0.7%.

There is a bigger impact on the price target, which is up to $65.78 from $56.34, given the translational basis of USD reported earnings forecasts that feed into an AUD based price target. The broker’s Overweight rating is maintained.

Analysts at Citi now expect a 0.96 read in the AUD by year end, down from 1.10 prior. Forecasts range from 0.96 down to 0.93 out to the end of 2016.

Citi, at Underweight, only pushed through a 1% increase for CSL’s FY14 numbers, with FY13-15 EPS forecasts unchanged. The price target saw a similar lift, jumping to $52.79 from $49.98. The broker otherwise thinks the stock is overvalued in terms of the earnings prospects on the table and the lack of room for any disappointment.

Citi also notes that stocks such as CSL are being bought for defensive growth, a theme likely to dry up sooner, rather than later.

Macquarie's currency forecasts for FY14 are in line with where spot rates were last month. That has the AUD/USD remaining around 1.03, the AUD/EUR close to 0.79, the AUD/GBP staying close to 0.67 and AUD/CHF at around 0.98. However, while forecast changes at this point are relatively minor, the broker notes that if the Australian dollar remains at current levels through to next year, there will be some very significant upgrades across Healthcare and a number of other sectors.

Much like JP Morgan, Macquarie is starting to see good value emerging from CSL. At current FX levels, the broker notes there is now up to a 5% AUD earnings tailwind that has emerged over the past month. In numeric terms, the PE for CSL is not an “expensive looking” 22x  but a much more reasonable sounding 20.2x FY14 earnings. This is a considerable historical discount, says Macquarie.

The broker has also extrapolated AUD weakness into its long term outlook, advising that were the AUD to find a new long term home at around 90c, it would boost AUD earnings by 12% for CSL.

Goldman Sachs has the AUS/USD at 1.03 for FY13, at 0.93 for FY14 and at 0.90 for FY15. The changes also saw the broker make some revisions to its healthcare coverage. For Ansell ((ANN)), the uplift was limited to a slightly higher price target, with the broker remaining more concerned about structural issues like latex costs and new product uptake.

Citi concurs on ANN, saying the company needs to put together some very successful new product launches in order to come up with 2H13 EPS that is close to 50% higher than 1H13. This is the number required to meet guidance.

The changes proved more considerable for ResMed, Goldman Sachs lifting FY14-15 EPS forecasts by 2.6% and 3.9%, while also revising the price target higher. The broker remains at Conviction Buy on the stock, although there are still concerns about the flow-on effect of competitive bidding and market share losses from competitor product launches.

JP Morgan notes the company will derive some significant benefit at the gross margin line from the lower AUD/USD. The broker explains 50% of the company’s cost of goods and 75% of R&D is denominated in AUD, while earnings are reported in USD.

On the broker’s numbers, current AUD levels imply 2% upside to FY14 USD reported earnings and an extra 1% to FY13. On the other hand, analysts at Macquarie see 6.8% EPS upside from current FY14 forecasts were the Aussie to remain at current levels and 12% upside were it to fall to 0.90.

ResMed is also Citi’s top pick in the sector, the broker of the view that the company’s 20% per year EPS growth prospects are not fully reflected in the share price. On Citi’s numbers, Resmed is trading on a 16x PE multiple. The broker is also not that worried about competitive bidding in the US, noting only about 6% of group revenues are exposed, and besides, ResMed has much more bargaining power than its customers.

JP Morgan advised that for Cochlear, the US and Europe account for around 40% of the group’s revenue base. Incorporating its latest currency revisions adds about 5% upside to FY14-14 EPS forecasts. Citi sees an extra 3% for FY13, 2% for FY14 and 4% upside for FY15. Otherwise, the broker sees sentiment softening a little as the steady growth defensive theme unwinds.

Macquarie sees things differently for ResMed, only ascribing 2.2% upside from current FX changes. The broker admits this is less than the company’s offshore exposure would suggest, but offshore earnings are hedged by offshore debt, so the impact is less pronounced.

Our last healthcare major with significant FX risk is Sonic Healthcare and JP Morgan doesn’t see near as much upside as for the others. The broker points out that the company’s exposure to the lower AUD/USD is limited as US costs are denominated in USD and there is also local debt hedging in place. Thus, positive changes of only 1% or so are made.

Citi sees downside risks to its SHL forecasts, although these are not FX related. The broker points out that if the company is unable to fully offset the funding cuts in Germany, forecasts will be at risk.

Macquarie sums up by saying that while the sector may look a little fully-priced on a historical basis, it is nonetheless highly leveraged to a falling AUD. With AUD weakness likely to continue, the broker sees increasing value beginning to emerge across most stocks.

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