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Is CSL Australia’s best ever company?

Paul Rickard
Thursday, August 15, 2019

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When the government-owned Commonwealth Serum Laboratories was privatised and floated in 1994, investors paid the princely sum of $2.30 per share. A few years’ later, the shares were split into three, which reduced the effective cost price to $0.77. Yesterday, after the release of its full year profit report, CSL shares closed at $234.00. For investors in the original float, they have enjoyed a gain of 30,000%!

I can’t think of any other ASX-listed company that can boast that sort of performance for its shareholders. Maybe Mike Cannon-Brookes and Scott Farquhar’s NASDAQ listed Atlassian has matched it in recent years, but locally at least, CSL is the clear stand-out.

Year after year, CSL has met or exceeded profit guidance, delivering sales growth in excess of 10% and profit growth even higher. And for an Australian company where more than 91% of its revenue is earned outside Australia, that is a pretty remarkable story.

The other interesting think about CSL is that it makes so little “noise” in the community. The ultimate “quiet Australian”, the fact that it is Australia’s third largest company by market capitalisation, bigger than the ANZ, NAB or Westpac, is a surprise to many. Few have heard of the CEO, Paul Perreault, who keeps a low profile with the media.

CSL employs 25,000 people globally, with females representing 57% of the total employee base. It has been named in the Thompson Reuters Top 100 Global Diversity and Inclusion Index.

These are some of the factors that make CSL Australia’s best company, and some might say, best ever company. And as befits a great company, it delivered for shareholders again yesterday.

CSL’s full year profit of US$1,919m was up 11% on FY18 and towards the higher end of earlier guidance of US$1,880m to $1,950m. Adjusting for the impact of exchange rates, profit rose by 17% to $2,015m. This came on the back of an increase in sales of 11%.

The result reflected continued strong growth in CSL’s core immunoglobulin and albumin  therapies, high patient demand for specialty products Haegarda (sales up 61%) and Kcentra (sales up 14%) and strong profit growth from CSL’s influenza vaccine business Seqirus. CSL opened 30 new US blood plasma collection centres, a new research facility in Melbourne, and progressed phase III trials for CSL112 (a therapy that helps remove cholesterol from the arteries of patients following a cardiovascular event).

Profit was assisted by a lower corporate tax rate, and cashflow from operations was down 14% to US$1,644m as expenses and inventory rose. The final dividend of US$1 per share (approximately A$1.48) was also slightly lower than expected.

A highlight was CSL’s fairly bullish forecast for FY20, which was better than the market had been anticipating. Notwithstanding a change to its distribution arrangements of albumin in China (which will see CSL move to a direct distribution model rather than deal through third parties), CSL has guided for total sales growth of 6% (up 10% when adjusted for the change in China) and profit growth in the range of 7% to 10%. This translates to a NPAT for FY20 of $2,050m to $2,110m.

What do the brokers say?

Going into the result, the brokers were largely neutral on the stock. While all acknowledge the undoubted strength of the company and its fantastic track record, the stock is seen as expensive (particularly in comparison to its global healthcare peers), trading on a multiple of around 37.5 times FY19 earnings and 34 times prospective FY20 earnings. Additional concerns include CSL’s ability to continue to win market share in immunoglobulins, plus the impact of the distribution change in China.

According to FN Arena, there were 3 buy recommendation and 4 neutral recommendations.   The following table shows the recommendations and target prices for the major brokers.

On the back of CSL’s better than expected profit guidance for FY20, brokers are expected to revise their earnings estimates and target prices modestly higher in the coming days. However, CSL will most likely trade at a premium to the new consensus price.

Bottom line

There is nothing in this result that would give a shareholder in CSL a cause for concern and apart from profit taking, there is no reason to sell. Stick with the trend.

Despite the earnings multiple, CSL should be a core stock in investors’ portfolio. It is the best company in Australia, and in the listed environment, has no peer. If you don’t own it and are scared about the price, mark it down on the watchlist to buy next time the market has a blip down.

Published: Thursday, August 15, 2019

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