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CSL delivers another stunner!

Paul Rickard
Thursday, August 16, 2018

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Oh, to go back to 1994 and have the opportunity to invest $1,000 in the privatisation of  Commonwealth Serum Laboratories, today called CSL Limited. 

Investors paid the sum of $2.30 per share, which was subsequently split into three giving an effective entry cost of just $0.77 per share. Yesterday, CSL’s shares closed on the ASX at a record high of $214.58. That same $1,000 invested in 1994 is today worth $279,875. Over the 24 years since privatisation, this is equivalent to a compound annual return (CAGR) of 26.4%!

CSL is now Australia’s fourth largest company by market capitalization at $97bn – bigger than the ANZ Bank, National Australia Bank, Wesfarmers and Woolworths. Only the Commonwealth Bank, BHP and Westpac are bigger.

To say that CSL is Australia’s “best company” is a huge call, but it is an accolade that is not out of place from a shareholder’s perspective. No other company on the ASX comes close to CSL’s record for profit growth over a sustained period. And as Australians, we should be celebrating CSL’s success because it is the global leader in its field of blood plasma products. It earns more than 90% of its revenue offshore.

Yesterday’s profit result was another stunner. 

Result highlights

CSL reported a full year profit of US$1,729m, up 28% on a constant currency basis on 2017.This was at the higher end of market forecasts, and above CSL’s recently revised upward guidance range of US$1,680m to US$1,710m.

Revenue grew by 11% to US$7,915m, with immunoglobulin sales up 11% to US$3,145m, haemophilia sales up 5% to US$1,113m, specialty product sales up 24% to US$1,490m and revenue from the Seqirus influenza vaccines surging by 16% to US$1,088m. Acquired back in 2016, earnings (EBIT) from the Seqirus division improved from a loss of US$179m in FY17 to a profit of US$52m in FY18.   

Shareholders were rewarded with a full year dividend of US$1.72 per share  (all unfranked, final dividend US$0.93), up 26% on the FY17 full year dividend of US$1.36. The dividend represents a payout ratio of 45%. 

Looking ahead, CSL forecast strong demand for plasma and recombinant products and guided to revenue growth in FY19 of around 9% in constant currency terms. On the back of expected margin growth from plasma product mix shift, specialty and recombinant products growth and further improvement with Seqirus, the company has guided to a NPAT in FY19 of between US$1,880m to $1,950m. This represents an underlying growth of between 10% and 14%., matching (already elevated) market expectations.

Capital expenditure in FY19 is expected to rise to US$1.2 bn to US$1.3bn (up from US$1.0bn in FY18), with investment in new products, growth in existing products, and new facilities and modernisation. The company plans to open between 30 and 35 new plasma collection centres, adding to the 206 centres that CSL operates worldwide. 

The only obvious cloud on the horizon is increasing US labour costs in connection with the collection of plasma.

What do the brokers say?

Going into the result, the brokers were bullish but wary on CSL. The wariness coming from the elevated pricing, with CSL trading on pre-result forecast multiple of 38.6 times FY18 earnings and 34.5 times FY19 earnings. According to FN Arena, of the 8 major brokers, there were 4 buy recommendations and 4 neutral recommendation. Target prices varied from  a low of $168.50 (Morgans) to a high of $232.00 (Citi), with a consensus price of $192.38.

CSL has “form” in guiding conservatively, so with guidance for FY19 of 10% to 14% meeting pre-result broker expectations and an overall upbeat tone to the outlook statement, it is likely that target  prices and earnings forecasts will be raised. While this may not lead to upgrades, it shouldn’t lead to any downgrades, notwithstanding the shares finishing up 6.4% on the day at $214.58. 

Bottom line

If you own CSL, hang on. There is no sign of the CSL train running out of steam. While you “can never go wrong taking a profit”, the adage “let your profits run” seems to trump the former more often than not. Particularly when you are backing a company on fire.

If you don’t own CSL, it should be on your shopping list. As the fourth largest company by market capitalisation, it is just too big to ignore. On a multiple of 36 times FY19 earnings, it is pretty expensive. So, while the strategy might be to buy in weakness, you need to have the discipline to buy when the market looks gloomy and the other indicators are telling you not to . Don’t be too greedy. 


Published: Thursday, August 16, 2018

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