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#Morgan Stanley’s View
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Last edited one year ago

Morgan Stanley’s top healthcare picks for ASX reporting season - TradingView. Com, 11th July 2023.

“Morgan Stanley says the recovery of healthcare earnings to pre-pandemic levels is more challenging than expected. Analysts favour companies that have recently provided guidance on upcoming earnings. 

“For most stocks, volume recovery to pre-pandemic levels has been sluggish accompanied by higher cost inflation, yet P/E multiples across the sector are generally inflated,” Morgan Stanley analysts said in a note on Tuesday.

“Staffing shortages have been a major detractor from volume recovery which could be more structural than transient (eg. nurses).”

Heading into August reporting season, the investment bank favours CSL (ASX: CSL) – which recently reset its FY24 expectations – as well as Sonic Healthcare (ASX: SHL) – where volume growth is robust and cost inflation has been contained.

Most preferred large caps: CSL, Ebos and Sonic Healthcare

CSL provided a market update on 14 June, which triggered a sharp 6.9% selloff. The update reaffirmed an FY23 net profit guidance of US$2.7 billion to US$2.8 billion and a first-time FY24 guidance of US$2.88 billion to US$3.01 billion, which missed analyst expectations. The stock has fallen a further 14% since the update and trading at levels not seen since July 2022. Morgan Stanley’s Overweight thesis is based on key points including:

  • “Industry data suggest that the trajectory of plasma recovery is accelerating.”
  • “CSL's plasma collections are now above pre-pandemic levels with positive momentum.”
  • “We don’t see change to the long-term picture despite the downgrade to our forecasts following the market update, but rather a 6-12 month delay in getting there.”

Morgan Stanley is “Overweight” on CSL with a share price target of $325.”

Held: IRL 9.4%, SM 19%

#A Safe Haven?
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Last edited one year ago

Recently we built up a large sum of cash in our IRL portfolios due to the Blundy-Itaoui acquisition of Best & Less (which has almost reached compulsory acquisition stage now, 90% of ownership).

Looking for somewhere to park the cash, I chose to invest in CSL shares. CSL is now in the Blue Chip dog house, closing at a 12 month low of $266.90. The share price has been going sideways for 3 1/2 years. I thought this might be a reasonably safe place to park a lot of cash with a 12 month horizon in mind. Hopefully I can still extract a bit of cash along the way (if needed) by selling a few shares.

Macquarie thinks CSL is a safe haven according to this article in the AFR from the 19th June - Macquarie’s seven stock picks to ride out weaker earnings - see excerpt below:

Safe havens

Its advice is to stay defensive, even in the face of the recent downgrades from safe havens such as CSL, Amcor and ASX.

Macquarie’s analysis suggests (perhaps unsurprisingly) that cyclical stocks deliver the most earnings downgrades when forward orders fall and the economy slows. Media, discretionary retail, financial services, insurance and banks all typically experience double-digit falls in EPS when the economy enters a downturn phase.

On the other hand, sectors such as health, telecommunications, consumer staples and utilities experience either earnings upgrades or below-average downgrades.”

Since this article was published on the 19 June, CSL has fallen a further 6 per cent, from $284.44 to $266.90. So NOT so safe in the short term. It might fall further yet! The chartists might be suggesting you to get out of CSL now and buy back in when the share price goes above $320? (That never makes much sense to me).

I am reasonably happy with the guidance for 2024 (NAPTA up 13% to 18% on the market update on 14th June) and they haven’t hit their straps yet with the Vifor acquisition.

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Most Brokers think there might be some upside to CSL according to the commentary by Bronwyn Allen on The Motley Fool yesterday:

Macquarie has an outperform rating on CSL shares with a $326 price target.”

“Morgans believes CSL shares are “poised to break out this year“. 

The broker has an add rating and a $323 share price target for CSL. 

Morgans says:

A key portfolio holding and key sector pick, we believe CSL is poised to break-out this year, a COVID exit trade, offering double-digit recovery in earnings growth as plasma collections increase, new products get approved and influenza vaccine uptake increases around ongoing concerns about respiratory viruses, with shares offering good value trading around its long-term forward multiple of ~30x.”

“The most bullish of the bunch is Citi. It has a buy rating and a 12-month price target of $340. This implies a 27% potential upside on the stock. 

This actually represents a cut in Citi’s share price target following CSL’s recent update, which revealed currency headwinds for the company, given it reports its earnings in US dollars. 

Citi was previously tipping $350 per share by the end of FY24. 

There is still the threat of a US recessionin FY24, which of course, isn’t good for US shares or ASX shares. 

But Morgan Stanley points out that US healthcare stocks have outperformed the market by an average of 13% during the past four recessions.”

The consensus share price target from 18 analysts on Simply Wall Street data is $324, which represents an upside of 21%.

Now all the analysts could be wrong. CSL is a complex global roll-up. I’m not even going to attempt to value it given there are hundreds of others who are more skilled than me already doing just that. Most think CSL is worth more than it is selling for now, and I don’t think it is going broke any time soon. So I think it might be a reasonably safe place to park a lot of cash for 12 months or so.

#Outlook and Guidance
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Added 2 years ago

Skipping straight to the outlook from CSL CEO  Paul Perreault’s address in the AGM announcement this morning. FY23 Net profit after tax is expected to between $US2.4 billion and $2.5 billion, a growth of 10 - 14% on a “like-for-like” basis. Given the current macro outlook and the weakness in the stock market this week, that is music to my ears!

Disc: Held IRL (7%), SM (18%)

Outlook

Finally, let’s move our attention to the outlook for your business. Looking specifically at CSL Behring:

• We see a continued improvement in plasma collections and that is expected to underpin strong future sales growth for our marginal litre products, IG and Albumin;

• The higher cost of plasma is still evident and expected to prevail in Financial Year 23; and

• We are looking to replenish inventory to a level that gives us more confidence on our ability to meet patient need, and in a more cost-effective way.

For CSL Seqirus:

• Product differentiation will continue to drive strong demand for our influenza vaccines, particularly Flucelvax

Across the enterprise:

• We expect to continue to be faced with challenges in the external cost environment, whether that be inflationary pressures, staffing constraints or the logistics and supply chain challenges

In terms of guidance for Financial Year 23, I am pleased to reaffirm that:

• Revenue growth to be in the range of 7 to 11% over Financial Year 22 at constant currency

• With net profit after tax expected to be approximately in the range of $2.4 to $2.5 billion at constant currency.

• On a like for like basis, this represents a growth of between 10 – 14%.

This excludes CSL Vifor earnings and costs associated with the acquisition, as well as

non-recurring COVID vaccine contribution.

Updated Financial Year 23 guidance, including CSL Vifor, will be provided at the CSL Vifor market briefing on October 17th

As always, our forward-looking statements are subject to the usual disclaimers as mentioned at the start of this presentation.

To close, I am absolutely certain that the fundamentals of our business are strong and the diversity of our pipeline is rich. This really sets up CSL to build on our track record of sustainable growth for years to come.

#Bull Case
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Last edited 2 years ago

David Clark, a partner at Cameron Harrison who is responsible for investment management, expects to see CSL trading back above the $300 mark before too long, according to an article in the AFR yesterday (30/06/22) He makes some good points to back his expectations below:

“The company’s revenues are driven by its blood plasma division (Behring with circa 70 per cent of revenue) and to a lesser extent its influenza vaccine division (Seqirus with circa 26 per cent).

Demand for blood plasma products remains very strong as stockpiles have diminished during the pandemic, with restrictions on movement limiting access to donation hubs and drastically reducing plasma donor rates. This segment of the CSL business has higher fixed costs, which has magnified the impact on the company’s margins, partly explaining the flat performance throughout the second half of the pandemic.

We expect to see plasma volumes exceed pre-pandemic levels in the second half of 2022 on the back of several tailwinds. In the US, higher incentive payments to donors have helped turned the downwards trend, with CSL’s plasma volumes up 18 per cent. Further, the company’s appeal to challenge a ban on plasma donations by Mexican nations on the B1/B2 visa was upheld last month, creating a potential tailwind into FY24.

Finally, donations tend to be inversely correlated with household disposable income, should the Fed tightening drive unemployment higher, this should help donor rates. As volumes rise, we expect to see a pronounced improvement in margins across the business.

Their vaccine business, Seqirus, has performed better than expected, with a bad flu season in the northern and now southern Hemispheres, driving strong revenue and EBIT margin growth. The success of the mass-scale COVID-19 vaccination program appears to have flowed into increased consumer comfort towards flu vaccines, which we expect to underpin higher vaccination rates.”

Disc: Held IRL and SM

#Bull Case
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Last edited 3 years ago

The CSL Vifor Pharma acquisition and the SPP offer closing on the 7 February is looking more attractive each day.

Others may disagree, but as a shareholder I am excited to see the share price weakness continue until the the SPP closes. If todays share price is anything to go by, eligible shareholders could be picking up CSL shares for around $263 including the 2% discount. The current share price doesn’t change the future outlook for the business, it just creates a more attractive buying opportunity.

Tristan Harrison from The Motley Fool shared some broker views on the Vifor Pharma acquisition and profit expectations as follows:

“Morgans likes the deal and thinks it adds value to CSL, whilst giving adding defensive earnings with more growth avenues.

Citi also thinks that the Vifor Pharma acquisition increases the value of CSL.

After the announcement of the acquisition both of these brokers increased their price targets for CSL by more than $10 per share.

Morgans now has a price target of $334.70 on the CSL share price, which suggests an upside of more than 20%. Meanwhile, Citi has a price target of $340 on the company, implying an increase of around 25%.

Profit expectations 

When CSL announced the acquisition, it confirmed that its FY22 net profit after tax (NPAT) guidance was for an approximate range between US$2.15 billion to US$2.25 billion.

Citi’s projections put the CSL share price at 40x FY22’s estimated earnings and 31x FY23’s estimated earnings. The broker has a buy rating on the biotech business.

Morgans thinks that CSL shares are valued at 41x FY22’s estimated earnings and 35x FY23’s estimated earnings. It also rates the company as a buy.”

Disc: Shares held SM & IRL