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Here’s why Citi just downgraded CSL

We examine why Citi downgraded the biotech from Buy to Neutral.

CSL share price: the story since March

Sometimes you have to be selective.

Year-to-date the CSL share price has risen a bit over 3%.

In the last six months it has gained less than 2%.

In the last five days its down over 2%.

But since its March 2021 low, it's up almost 20%.

In fact, it’s because of that outperformance since March that Citi analysts lowered their rating on the biotech giant from Buy to Neutral, though kept their price target of $310 per share on the stock unchanged.

Overall, the investment bank noted that this downgrade wasn’t based on operational performance or fundamentals – but on valuation. Indeed, despite the downgrade, Citi remains bullish against the sell-side consensus, with FY23 earnings estimates approximately 15% ahead of consensus, while also noting that the belief is ‘the plasma collection market will normalize this year.’

Ultimately, Citi elaborated that ‘We expect that the recovery in plasma donations will continue in the USA, which is reflected in our FY23 EPS being 15% ahead of consensus.’

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Revisiting the interim results

Despite the coronavirus proving to be a significant headwind for CSL – primarily in relation to the pandemic’s impact on the company’s plasma collection operations – the biotech nonetheless posted strong interim results in February.

Looking at those results, CSL reported profits (NPAT) of $1,810 million in the first-half of FY21, implying a year-on-year increase of 44% on a constant currency basis.

This translated to earnings per share of $3.98 per share and an interim dividend of US$1.04 per share.

At the time, the company guided for full-year (FY21) profits of between $2,710 million to $2,265 million, on an after-tax basis.

As CSL's CEO, Paul Perrealult said during the interim release:

'COVID-19, however, will continued to have an impact on CSL. Our plasma collections have been adversely affected during the pandemic. To combat this, we have implemented a number of initiatives to increase plasma collections and introduced a customer fulfilment process to ensure the equitable distribution of medicines to patients.'

'We remain the industry leader in opening new plasma collection centres and investing in future innovation - positioning CSL to emerge strongly when the COVID-19 crisis recedes.'

Looking at how CSL's guidance compares to Citi's own estimates, the broker on Tuesday said it expected the biotech to report total net profits (NPAT) of $2,335 million for the full-year. That figure, which is ahead of CSL’s own top-end earnings estimates, highlights that despite the ratings downgrade, Citi does indeed remain optimistic on the stock.

CSL closed out Wednesday’s session around the $293 per share mark, still around the top band of the stock’s 52-week range.


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