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Uncertainty Prevails For CSL

Australia | Aug 19 2021

This story features CSL LIMITED. For more info SHARE ANALYSIS: CSL

Timing will be everything for CSL, which is endeavouring to keep up the flow of plasma while collections activity remains beset by the pandemic

-Plasma collections recovering but still well below FY19 levels
-Impact on gross margin is the main risk to earnings recovery in FY23
-Any prolonging of the pandemic adds material uncertainty

By Eva Brocklehurst

The trajectory of CSL Ltd ((CSL)) earnings remains tied to the timing of a recovery in plasma collections and any further delays or difficulties in this area could have major implications for the stock.

Timing is everything, brokers assert, given the lengthy manufacturing cycle for immunoglobulin, derived from plasma, as well as higher costs amid the ongoing pandemic. Management is optimistic that conditions will normalise during the current fiscal year and the recent increase in donor fees should enable collections to be maintained.

Yet Ord Minnett suggests the risk for demand destruction exists, as treatment of some patient groups could be switched to other, possibly inferior, products if immunoglobulin supply cannot hold up.

That said, the broker is confident plasma collections can surpass pre-pandemic levels before the end of 2021 and procure a strong lift in earnings in FY23. There has been some necessary drawing down of inventory, Goldman Sachs points out, although at this stage although there is no material problem with demand.

Guidance implies material headwinds associated with lower plasma collection, with an improvement in the volume collected in the December quarter and 2022 required to meet FY23 forecasts, Macquarie points out.

CSL achieved 3% immunoglobulin growth in FY21, through optimising pricing and supply across geographies and channels and has guided to constant currency revenue growth of 2-5% in FY22.

Raw plasma volumes declined -20% in FY21 and while collections continue to recover they are well below FY19 levels. Given the 9-12 month production cycle, each day that collection deficits persist this produces further challenges to the FY23 recovery, Goldman Sachs asserts,

Management is currently not taking on new customers for immunoglobulin to ensure sufficient inventory available for existing patients. Credit Suisse expects earnings will continue to be affected by the pandemic, even if collections recover back to pre-pandemic levels in the next six months.

This stems from the higher cost of collections (donor fees), which is likely to be sustained. The broker expects net profit in FY23 of US$2.6bn, with gross margins still below pre-pandemic levels at 55.4%.

Citi agrees the main risk to FY23 is the pace of recovery in plasma collections and the resultant risk to gross margin. Guidance implies a FY22 earnings decline of -5-9% and CSL expects to open 40 new plasma collection centres in FY22.

R&D expense will be around 10-11% of revenue as those projects halted during the pandemic ramp back up. CSL achieve 3% immunoglobulin growth in FY21 with initial analysis suggesting the main way this was achieved was through optimising pricing and supply across geographies and market channels.


Morgan Stanley asserts the magnitude of any rebound in FY23 is the most important issue for the share price rather than any first-time guidance for FY22, suspecting another round of downgrades to consensus expectations.

The broker downgraded the stock just prior to the pandemic and acknowledges now, after a trough year in FY22, the shares could trade to $308, as confidence in the rebound gains momentum and negative revisions to earnings cease.

As Morgan Stanley has more confidence in the pace of supply recovery in immunoglobulin by FY23 compared with the pace of demand recovery and, amid a possible prolonged imbalance, reiterates its base case and an Equal-weight rating with a $280 target.

Goldman Sachs finds many reasons to like the stock but believes the current valuation does not reflect the extent of uncertainty. Moreover, FY22 earnings guidance subdued as, even assuming typical conservatism, it implies a 4% growth rate from FY19-22 and this profile lags other large manufacturers.

Hence, Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, maintains a Neutral rating with a $302 target yet still anticipates plasma collection volumes will exceed FY19 levels at some stage in FY22.

In contrast, Wilsons, also not one of the seven, maintains an Overweight rating and $320 target and believes plasma collections will not support a full recovery in immunoglobulin supply growth until FY23. The database has two Buy ratings and five Hold. The consensus target is $308.84, suggesting 5.1% upside to the last share price.

Ord Minnett also postpones expectations for the earnings recovery by several months which results in a -10% reduction to earnings forecasts for the Behring division in FY23. This reflects weaker sales in the early part of the year because of constrained supply and associated cost and margin headwinds.

Despite the revisions the broker is confident of a strong rebound by the second half of FY23 as supply of immunoglobulin normalises. Ord Minnett also highlights the threat of further delays to a plasma collection recovery and surging coronavirus cases in some US states amid a lack of clarity on the Mexican border issue.

Citi finds FY23 difficult to forecast because of the fluctuating revenue and costs depending on how the pandemic evolves yet believes CSL is better positioned than peers in terms of collections, continuing to gain market share.

Morgans, while acknowledging the timing of a turnaround is uncertain, agrees CSL is a core holding and in the best position versus peers to meet growing patient demand.

Other Business

The vaccination business, meanwhile, is set to sustain or exceed performance in FY22. Seqirus, in Macquarie's view, is currently the most valuable source of growth and diversification for the company.

Influenza vaccine revenue rose by 41% in FY21 with a record 130m doses distributed globally and a shift towards higher value products. There is slower growth in specialty products with hospital projects affected by reduced elective procedures during the pandemic.

Macquarie points out CSL will commence phase 1 of the next-generation self-amplifying mRNA vaccine in 2022 and first patients have now been enrolled in the Garadacimab phase 3 trial for the prevention of hereditary angioedema.

Phase 3 for CSL112 has now been enrolled and as recruitment has slowed first results are expected in October 2022. A phase 2 QIVc influenza vaccine trial has also commenced.

See also, Is CSL's Plasma Recovery Now Priced In? on June 23, 2021.

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