CSL's strength is still in its blood

While there are few certainties when it comes to investing, CSL (ASX: CSL) shareholders have come to expect solid financials from the company. And with good reason.

CSL is a leader in the plasma and immunoglobin (IG) spaces, dominant in a range of other specialties and has a strong pipeline in research & development. It consistently ranks amongst our readers’ top stock picks – and is popular with many Australian fund managers too.

For Dr Shane Storey, senior analyst covering healthcare at Wilsons Advisory, CSL is still a buy.

“The strength developing in the core businesses (Behring, Seqirus and now Vifor) is probably yet to be fully factored into the outlook,” he says.

He continues to be positive about CSL's outlook having previously commented on their pipeline in wires for Livewire.

“The pipeline is what gets us out of bed on CSL. So many different new biological medicines are coming through their pipeline. It’s probably the best pipeline of their history at the moment.”

Note: The interview took place Tuesday 14 February 2023. This stock is a core holding in WILSONS portfolios and is one of the team's top "quality defensive" names.

CSL H1 Key Results

• Revenue US$7.18 billion, up 25%
  - Immunoglobin revenue $2.27 billion, up 19%
• Operating results $3.38 billion, up 18%
• NPAT US1.62 billion, down 7%
• NPATA US$1.82 billion, up 10%
• Plasma collections up 36%
• Interim dividend US$1.07 up 3%

CSL placed in the top 10 for the effectiveness of CEO (3), Growth prospects (2), Sustainable competitive advantage (2) and Investment Desirability (8), according to MarketMeter. For more information on MarketMeter, please click here.

In one sentence, what was the key takeaway from this result?

The rebound in CSL’s core plasma business is outflanking competitors but the Vifor acquisition’s debut was a big surprise for many and a driver of an earnings beat for the first half of FY23.

What was the market’s reaction to this result? In your view, was it an overreaction, an under-reaction or appropriate?

The market response today has been muted (+1.5%) and would seem to underplay the quality in the result. 

The market was hoping for a guidance upgrade but this was probably held in check by slower progress on gross margin improvement. 

There was clear evidence that the process of margin recovery (from COVID pressures) has started. If there is a ‘delay’ it likely reflects the complexity of how CSL’s global manufacturing footprint recaptures its peak capacity and efficiency. 

Pricing dynamics are also complex in CSL’s key markets at the moment but we see a tighter pricing environment being offset by lower input costs, higher organic growth and market share gains. Investors are also taking their time in warming to CSL’s Vifor acquisition which contributed 5 months to this result. It’s reporting debut ‘beat’ on both revenue and segment earnings, so this should stimulate more Vifor research.

Were there any major surprises in this result that you think investors should beware of?

CSL’s raw material collections growth of 36% surprised positively but also blunted operating cash flow in the short term, more than anyone expected. Investors are forgiving of this because it speaks to elevated sales growth and market share potential over FY24-25. 

CSL Behring’s star products IDELVION (haemophilia B) and KCENTRA (bleeding control) continue to surprise analysts every period. 

As noted above, Vifor grew its top-line revenue by 15% on debut (versus unaudited results) which was at odds with some dour commentary emanating from the dialysis markets they serve.

Would you buy, hold or sell CSL on the back of these results?

Rating: Buy

We are buying CSL because the strength developing in the core businesses (Behring, Seqirus and now Vifor) is probably yet to be fully factored into the outlook. 

On the key topic of plasma, looking only at sales and volume at an industry level, one could ask ‘what pandemic’, such has been the recovery. Our view is that CSL is emerging from this situation with profitability advantages compared to its key competitors (driven by mix and gross margin), which may help achieve further market share gains. 

The influenza vaccine market has been a structural, net beneficiary of COVID, enjoying a durable step-change in annual demand. Seqirus has potential capacity advantages that could become decisive in this marketplace, over the next 3-5 years. Finally, CSL’s evolution as a ‘biotech’ drug developer is delivering key assets with astounding potential margins (e.g. HemGenix, CSL112 and garadacimab).

What’s your outlook on CSL and its sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

Over the next 12 months, we see four catalysts. 

Investors will focus on gross margin improvement for CSL Behring as COVID headwinds ease (input costs and scale inefficiencies) ease. 

Another swing factor is the performance of new haemophilia B product HEMGENIX which we’re backing to grow CSL’s franchise at US$3.5M per dose. 

In recent years investors have fretted about new competition in neurology but key clinical trial results this year should clarify that situation. 

Finally, CSL’s monumental AEGIS-II clinical trial for CSL112 is expected to read out in early 2024. CSL112 is the largest product in CSL’s R&D pipeline with peak sales estimates ranging from US$2.5B to more than US$3.0B.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?

RATING: 3

We rate CSL’s valuation as a 3 but maintain a positive view on the stock. 

Our price target of $345 per share is a ‘sum-of-parts’ valuation: approximately 75% for the core business plus 25% for the company’s R&D product pipeline. The inclusion of these assets in our valuation is potentially controversial, given the majority of them are yet to be approved and commercially proven. We include them in a way that adjusts for technical and commercial risks. 

The successful commercialisation of these assets over the next three years has the potential to add materially to CSL’s valuation (our un-risked price target is $485 per share). 

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