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AU earnings: CSL faces post-pandemic recovery challenges; analysts predict strong upside potential

Major healthcare company CSL faces hurdles in its rebound from the pandemic's impact, including slower-than-expected recovery and margin challenges, while analysts foresee a potential 20%+ share price growth.

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This week on Investor Spotlight, we focus on major healthcare company CSL as it encounters hurdles in its rebound from the pandemic's impact. Amid slower-than-expected recovery and margin challenges, analysts foresee a potential 20%+ share price growth in the Pharmaceuticals, Biotechnology, and Life Sciences sector.

CSL faces challenges in its post-pandemic recovery

Major healthcare companies in the Pharmaceuticals, Biotechnology, and Life Sciences sector, like CSL, are known for performing well throughout the economic cycle, driven by a highly defensive earnings stream from specialty blood plasma products and influenza vaccines.

However, the pandemic has had a more enduring impact on CSL than initially anticipated. Forced lockdowns resulted in the closure of blood collection centres, and the benefits from reopening have been slower to materialise than expected.

Challenges in margins and acquisitions

Blood donor fees and labour cost inflation have exceeded analysts’ and the company’s forecasts. Citi notes that the CSL Behring margin recovery to pre-covid levels has been pushed out to FY26-FY28 (compared to previous expectations of FY26). In fact, donor fees are unlikely to ever return to the pre-pandemic levels, highlights the broker.

The combination of a slower recovery in gross margins, uncertainty around the Swiss-based 2022 Vifor acquisition, increased potential competition in blood plasma, a new CEO, Dr Paul MacKenzie (the company’s Chief Operating Officer for the last four years), as well as currency fluctuations, have all weighed on the CSL share price.

Much to the chagrin of investors, CSL’s share price has traded in a range for the last three years, compared to the investment darling over the past two decades.

CSL four-hour chart

Source: IG

Lowering the bar for earnings ahead of results

(Note: earnings quoted in USD)

CSL, a prominent player in the healthcare sector known for surpassing expectations, faced an unexpected challenge during Australia's confession season. The company typically upgrades guidance, but this year, due to currency volatility and fluctuations, CSL had to revise its earnings outlook on June 14.

The revised guidance reflected an increase in foreign exchange headwind from $175 million in February 2023 to $230 million to $250 million in June. Consequently, the consensus for NPATA (net profit after tax adjusted for constant currency) was downwardly revised by 2-5%.

Moreover, CSL made significant adjustments to its FY24 guidance, unveiling a new projection of 14%-18% earnings growth, equivalent to $2.9 billion to $3.0 billion. This resulted in a consensus earnings downgrades ranging from 12% to 17%. The forecast for gross margins in FY24 also indicated only a modest improvement of 360 basis points.

As a direct outcome of the updated guidance, CSL's share price experienced a substantial decline, dropping from $308 to a low of $258, representing an almost 17% decrease.

CSL's results under scrutiny

The factors that matter for CSL's results to meet and exceed guidance are crucial as this reporting season poses challenges for investors due to heightened market volatility. ResMed's recent performance serves as an example, where a miss on gross margins led to significant declines in share prices in both Australian and New York trades.

Given this backdrop, investors are vigilant for any weakness in margins, earnings, or guidance from CSL. The company's earnings report holds heightened significance as it enters the results on a less favorable footing, having downgraded expectations just four weeks ago. However, a miss in the upcoming report seems unlikely.

Analysts will closely focus on four key aspects of CSL's earnings profile

  1. Reassurance on the progressive improvement in gross margins for Behring, particularly blood plasma (Ig or immunoglobulin)
  2. Further reassurance regarding the Ig business, especially following competitor Argenx's positive outcome from the phase 3 Adhere study. FNArena highlights the increasing competition faced by CSL's Behring business in its chronic inflammatory demyelinating polyneuropathy (CIDP) products from Netherlands-based biotechnology company Argenx, posing a potential risk to 12% of group revenues
  3. The outlook for the upcoming flu season in the Northern Hemisphere and the performance of CSL Seqirus
  4. Insights into the performance of recent acquisition Vifor, as well as CSL112, a new drug designed to prevent recurrent cardiovascular events.
Source: Bloomberg

Earnings outlook and broker ratings

Despite the recent guidance updates, the broker community remains positive on CSL. Price targets have adjusted downward, with FNArena at $328.17 and Refinitiv at $320. CSL's current valuation is considered appealing for long-term entry points. Jarden and Wilson's have overweight ratings with $333 target prices.

With a higher valuation multiple of around 30x prospective earnings, the dividend yield for FY23 is 1.5% and 1.7% for FY24 according to FNArena forecasts.

Earnings growth and the resilience of earnings have historically supported capital returns for shareholders, with CSL Behring and plasma products driving 240% of the share price return between 2015-2019.

According to Refinitiv, broker ratings for CSL include four Strong Buys, 12 Buys, two Holds, and one Sell rating.

Lowering the bar for earnings ahead of results

CSL experienced an unusual deviation during Australia's confession season, lowering guidance due to currency volatility. The downward revision in NPATA and reduced FY24 guidance led to a significant decline in the share price.

The upcoming earnings report will be closely monitored, with a particular focus on gross margins, competition in the Ig business, the flu season outlook, and the performance of recent acquisitions.

Earnings outlook and broker ratings summary

Source: Refinitiv

Earnings outlook and broker ratings

Despite the recent guidance updates, the broker community remains positive on CSL. The current valuation presents an attractive long-term entry opportunity, with analysts estimating potential 20% plus upside to the share price.

Morningstar forecast chart

Source: Morningstar

Addendum: CSL earnings forecasts

Earnings forecasts by Morningstar and FNArena are available, with Morningstar's estimates positioned at the lower end of average broker forecasts. Investors and analysts eagerly await the earnings report to gain a clearer picture of CSL's performance and potential for growth.

FNArena forecast chart

Source: FNArena

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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