Ask FNArena: CSL, Charter Hall & Dexus

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

Earlier this month we asked investors to send in their questions. Today, we answer two questions received.

By Rudi Filapek-Vandyck, Editor

First… A number of subscribers has grabbed the opportunity to express their appreciation with the work we do here at FNArena.

Thank you all, multiple times over. Not everyone necessarily realises at times the team at FNArena quasi literally moves mountains, especially during the peak of reporting seasons.

It feels great to see your appreciation popping up in messages and emails, and we’ll use it as extra-motivation to do even better in 2025.

Question One: has CSL ((CSL)) become too big for its own good?

Short answer: absolutely not. Despite the oft repeated narrative that small caps offer so much more opportunity, most small caps have found it incredibly challenging to beat the performances achieved by local large caps such as WiseTech Global ((WTC)), Goodman Group ((GMG)), Car Group ((CAR)), REA Group ((REA)), Xero ((XRO)), Aristocrat Leisure ((ALL)) and Macquarie Group ((MQG)).

I am not only referring to recent share price performances. The growth achieved by ASX-listed quality, large-cap businesses is simply astonishing, and ongoing.

Up until not that long ago, CSL was part of this selection too, but the overall environment has unexpectedly become a lot more challenging for Australia’s premier biotech. The share price has essentially traded sideways in a range roughly stretching from $230 at the bottom and $313 on the upside, but mostly around the $270-$280 level.

In a very simplistic explanation: the company is going through a period when everything that can go wrong, mostly does. Some of it is self-inflicted, like the underperforming acquisition of Vifor, many other factors are outside of management’s control.

Healthcare as a percentage of the S&P500 index in the US has now shrunk to its size during the dot com era, which is more than two decades ago. The latest headwind stems from general vaccines skepsis attached to the upcoming Trump administration.

As so often is the case, those who concentrate on and only take guidance from the share price do not see a future ahead for the company. Those who watch fundamentals already know FY24 financials were a step up from the three years prior, and FY25 should deliver further improvement.

Management is forecasting double-digit growth. The key to understand is this growth stems largely from the fact plasma-collection continues to grow solidly and management is working on returning the operational margin back to pre-covid level.

The combination of those two factors should see CSL growing at double-digit pace for multiple years to come. Note: dividends have continued growing, except in FY21.

So why is the share price not performing? How long is a piece of string?

We don’t always know what is the share market’s next obsession, but what history does show us is if EPS and DPS continue growing, as they are, the share price will eventually follow. This is exactly why I am not wavering from my positive view on CSL.

One added observation: the post-covid years have pulled down just about every financial metric for this company, from return on capital employed, to return on equity, free cash flow, net profit margin, et cetera. To a large extent, this explains the de-rating that has taken place over the years past.

Yet again, the negative trend in most of these financial metrics has stopped deteriorating in FY24. I am keeping my fingers crossed that further improvements in FY25 will once again put upward momentum underneath the share price and we can all start concentrating on the share price’s trajectory towards $500.

As we can all relate from experiences in our personal lives, these periods eventually exhaust themselves from delivering more negative news. Another company that is currently going through a similar experience is Woolworths Group ((WOW)).

Both CSL and Woolworths shares remain tightly held in the FNArena-Vested Equities All-Weather Model Portfolio.

Question Two: Can I have short and medium term views on Charter Hall ((CHC)) and Dexus ((DXS)).

Part of the investment thesis for holding REITs is that bond yields are still likely to trend lower over the year ahead, even though that trajectory won’t be smooth and straightforward, and it’ll be more of a US-centric phenomenon with the RBA still on hold and maybe only delivering two rate cuts next year.

There’s also still the possibility US president Trump’s stimulus policy achieves the exact opposite, but we’ll have to wait and see.

A large part of the bond-inspired recovery has already occurred throughout the months past. This is why Charter Hall shares are no longer trading around $10, but nearer to $15 nowadays.

If we take a positive view, there can be further upside to the magnitude of 25%, as expressed by Morgan Stanley’s $18.50 price target, but things must turn around operationally for this to become a real possibility.

Plus general sentiment needs to believe any turnaround will be sustainable.

Contrary to the halcion years leading up to FY21, the overall environment is a lot more challenging for what still is only a medium-sized property developer and manager as is Charter Hall. The market capitalisation is below $7bn.

While this is many times over larger than Centuria Capital Group’s ((CNI)) $1.5bn, while HMC Capital’s ((HMC)) has grown to $4.6bn, the local sector leader Goodman Group’s market cap now exceeds $70bn.

Smaller is by definition not necessarily better when times are tough and Charter Hall’s strategy via asset recycling and funds management is facing more headwinds through higher bond yields and downward pressure on real estate valuations, in particular offices and shopping malls, but industrial developments are also confronting less demand, if we exclude data centres.

Bottom line: better times will announce themselves. If not in February, when Charter Hall releases its interim financials, then surely by August or this time next year, by which the RBA most likely will have delivered its rate cuts and the experienced and entrepreneurial management at Charter Hall is cycling easier comparables with better momentum underpinning the sector overall.

In the meantime: just be aware that anything happening in bond markets can and probably will have an outsized impact on the share price, but these things don’t tend to have a lasting impact. Unless one believes we are approaching a repeat of the high inflation times that lambasted societies throughout the 1960s and 1970s, which is certainly not my vision for the future.

Dexus is of a similar size as is Charter Hall, and both are officially part of the local REITs sector, but the differences are pronounced. Dexus’ core existence consists of owning and managing office buildings and that sector is going through a nasty and enduring bear market. It’s tough out there if you’re in Dexus’ situation.

Which is why management is diversifying into other segments. History tells us these are elongated processes and in the meantime bearish sentiment towards office properties will continue to keep most investors at bay.

I cannot tell you when offices will be back en vogue, that’s not my expertise. The best forecast I can make is today’s shareholders might have to be patient for longer. Dividends have been cut already, and might have found a base around current level. That suggests 5.5% yield, which provides support to the downside.

If I had to choose, I’d opt for Charter Hall instead. As reported previously, the above-mentioned All-Weather Portfolio owns HomeCo Daily Needs REIT ((HDN)) instead and its shares have equally fallen recently to circa $1.15. I blame US bond yields for that.

More questions and answers to follow in the days ahead.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi’s View stories. Go to My Alerts (top bar of the website) and tick the box in front of ‘Rudi’s View’. You will receive an email alert every time a new Rudi’s View story has been published on the website. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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