After a decade of nothing but good news for investors in CSL (ASX:CSL), shares fell by ~25% between June and October, a decline sparked by profit downgrade and consequential fears that the company’s run as the poster child for the ASX biotech sector coming to an end?
First published June 21, 2023; last updated December 4, 2023
Who is CSL (ASX:CSL)?
For the sake of investors who are new to the story, let’s recap the company.
CSL has two primary businesses: flu vaccines and blood products – it takes plasma from donors and turns it into life-saving therapeutics, particularly immunoglobin products. Plasma is the substance that carries red and white blood cells through the body – these therapies are relevant for disorders such as hemophilia, primary immune deficiencies, hereditary angioedema and inherited respiratory disease.
CSL was once a government entity, established in 1916. It was privatised in 1994 at $2.30 a share, although it undertook a three for one share split in 2007 making its IPO price 76.7c in real terms, meaning it has been more than a 300-bagger since listing!
The company has a long R&D pipeline that grew substantially after the 2021 acquisition of Switzerland’s Vifor Pharma, which cost US$11.7bn.
And it had some exciting catalysts to come including earnings from Vifor and the potential FDA approval of Hemgenix (the world’s first gene therapy for haemophilia B).
But shareholders have less optimistic this year.
Why have CSL shares fallen?
The company gave a rare profit downgrade on in mid-June last week, leading to shares falling by 8% on that day and by 25% over the following 4 months.
Margins were suffering given foreign currency headwinds, higher costs it had to pay to collect plasma as well as increased competition in the iron deficiency market – which it entered after acquiring Vifor.
It told investors it was expecting its post-tax profit (excluding amortisation and impairments) in FY24 (the 12 months to the end of June 2024) to be US$2.9-$3bn whilst consensus had suggested US$3.5bn.
Although results for FY23 would meet guidance, at US$2.8bn on an underlying basis, the statutory result would likely be dragged down by forex fluctuations – to US$2.55bn.
The company had previously flagged a forex hit, but only US$175m as opposed to the US$250m that it now expects.
Arguably the impact f the profit downgrade was magnified because it has a virtually spotless record – at least in the last decade under the leadership of Paul Perrault.
The company’s begs the question: Is there anywhere to hide from inflation in this market? Maybe, but perhaps CSL is not one of them. Or is it?
Why have CSL shares risen since October?
The company ultimately delivered its FY23 results which came in line with expectations, and the company reiterated its guidance. Come October, the company held an Investor Day. It does not appear that anything new was announced, although reiterating how solid a business it was surely hasn’t hurt. It is the number 1 business in plasma protein therapies and iron deficiency as well as second in influenza vaccines. It is expecting annual double-digit earnings growth
We understand investor despair that CSL may not be as immune to inflation as we thought it was.
But it is still a solid business that is still expecting good growth in FY24 even with the downgrade.
Consensus estimates (among 18 analysts) expect 10% revenue growth, 27% EBITDA growth and 25% EPS growth in FY24.
Looking ahead to FY25, 9% revenue growth, 13% EBITDA growth and 21% EPS growth. And the median target price is A$308.63 per share – a ~16% premium to the current price. Its P/E isn’t low by any means, at 29x for FY24, but perhaps you might be getting what you pay for. There are companies with far smaller margins that trade at higher multiples – look no further than the WAAAX stocks.
Whilst buying the dip may not be an investing strategy that works out with all companies, CSL might well be an exemption.
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