Record dividend for CSL, but subdued growth on the horizon

Australia's favourite long-term growth story and biotech darling CSL (ASX:CSL) has reported its full-year results, with net profit after tax up 10% to approximately US$2.4 billion. 

Despite the challenges facing the business during the COVID-19 pandemic, CSL lifted its final dividend to a record US$1.18 (AU$1.61) per share, franked at 10%. Its total full-year dividend has increased to US$2.22 (AU$3.06) per share, in reflection of the board's confidence that the biotech can once again return to sustainable growth in the future. 

"COVID-19 has presented many challenges for our business, our supply chains and in particular the collection of plasma, an essential raw material used in the production of many of our therapies," CSL chief executive officer and managing director, Paul Perreault said. 

"Whilst plasma collections across the industry have been adversely impacted by COVID-19, CSL implemented multiple initiatives to mitigate this and continue to deliver on providing our patients with the life-saving and life-extending medicines they need."

In disappointing but perhaps expected news for shareholders, the biotech giant has flagged its profits will fall over the year ahead, providing guidance of US$2.15 billion to US$2.25 billion (after-tax) for FY22. 

For a deeper understanding of what this all means for the future of CSL, we invited long-term shareholder and CSL bull Sean Fenton, from Sage Capital, to highlight the good, the bad, and the ugly of the biotech darling's full-year result. 

Note: CSL is one of Sage Capital's top ten holdings. Ally Selby is also invested in CSL. 

What was the key takeaway from CSL’s result?

CSL is a high-quality company that continues to deliver great growth, and we saw that again in this year's result. 

The result came in a little bit better than market expectations. Its core Immunoglobulin franchise is performing really well, and it continues to get some mixed shift from Privigen, its intravenous injection and into its subcutaneous injection Hizentra. So that has helped margin and mix. And again, they're also getting good growth in Albumin across China, with some good exports there. Seqirus, their flu business, performed well too. 

Generally, it was a very solid result. The real question revolves around what happens in FY22 and the collection issues from COVID-19. 

Did the result beat, meet, or miss your expectations?

It was definitely a beat. It wasn't massive, but it came in better than expected. It was a fair bit stronger than the company's own guidance, but they generally set pretty conservative guidance, and the market's expectations were a little higher anyway. 

It was really that improvement in mix shift in CSL's immunoglobulin portfolio that came in a bit better than expectations. 

Were there any major surprises in these results that you think investors should be aware of? 

There were no major surprises. I think the guidance was below expectations for 2022. That really reflects the lower collection rates through this year in the US, particularly from the impact of COVID-19 and how that flows through into product availability for next year. 

FY22 is going to be a transitionary year for the company. It's going to be a year that it doesn't grow at its normal rate. But there are certainly no nasty surprises or red flags in there for CSL. 

It does continue to grow both its top and bottom line, it's got really good cash realisation, and that flows through and supports CSL's growing dividend payments. We continue to expect to see good dividend growth out of the company. 

CSL also has a history of doing share buybacks. It doesn't have the same level of franking that most Australian companies have, as it has a lot of offshore earnings. So CSL quite often does share buybacks to return capital to shareholders in a more tax-effective way. 

We may not see one this year, as it is more of a transition year for the company and CSL is investing in different areas of its business, but buybacks should be on the cards down the track. 

What's your outlook for CSL and the healthcare sector? 

CSL has continued to be able to grow. It's been able to find new products and new areas to grow into. It's taken its core plasma collection franchise and continued to develop new products. It's moved from the base products of immunoglobulin and haemophilia products to recombinants for haemophilia. It's moved into speciality products, like Haegarda, at a higher margin. 

Its also expanding its flu business with the acquisition of Seqirus. CSL is expanding its collection centres and scaling up to be a global manufacturer of excellence, which has been really positive for them. 

CSL also has other things in the pipeline; new products, it has a large-scale trial for CSL112, which is looking at treating bad cholesterol and heart attack risk. So that's a potential growth area for the company as well. 

Healthcare in general - we are all getting older, we are all getting, hopefully, more wealthy. So the demand for healthcare is solid and CSL is well-positioned in growing a global franchise in its speciality areas. 

Off the back of that result, would you Buy, Hold, or Sell CSL?

I would be buying CSL. The market is very concerned about there being weak guidance for FY22, but sometimes because the market is positioned that way it will already be reflected in the share price. 

So while it will be a transition year, the company typically gives conservative guidance. We see opportunities for CSL to actually beat that guidance and then be growing strongly again in 2023 and onwards. 

Within the spectrum of healthcare companies and growth companies, CSL is a high-quality grower and is actually pretty attractively priced where it is at the moment. 

Could concerns over plasma collection in the US be overstated? Could this issue result in an increase in the price of CSL’s end products?

I think the concerns have been a bit overstated. It's clearly a one-off event and impact - at least we are all hoping it's a one-off and the vaccine rollout will see everything return to normal. 

Eventually, collections will return once again. COVID-19 has created some disruption in the short term, but it's been disruptive to the whole industry, it's not specific to CSL. The company is taking the opportunity to maximise its revenue through mix; through shifting more products into different solutions but also different geographies - so out of Europe into the US, where there is better pricing. 

While there are constraints on CSL's products we expect there to be stronger pricing across the board. CSL doesn't like talking about its pricing, as it provides essential and in many cases life-saving therapy for a lot of people. But the reality of economics is that when supply is constrained, prices go up. 

So we see the opportunity for them to surprise investors with stronger pricing through next year, opening them up to beat their guidance and setting them up quite well for 2023. 

Ironically, while there is high unemployment - which is normally an environment where people go out and donate more plasma because they need the money - but because all around the world there have been great unemployment benefits, people haven't needed to do that. We are starting to see that roll off now and we are already seeing collections start to bounce back and a recovery there.  

People's concerns are diminishing, we are opening up, vaccination rates are going up. We will get back to normal. We will get through that transition period for CSL. You can get a little myopic about its reports and earnings and ignore the long-term growth profile that's available. 

CSL is currently trading on a forward PE of 42.4 times (for FY22). In comparison, its market cap peers CBA and BHP are trading on forward PEs of 19.6 times and 9.7 times, respectively. Do you think paying this premium for growth is justified? 

That's probably a broader question beyond CSL and really goes back to what drives those premiums. So 42 times earnings does sound like a lot but bear in mind that it will be a transition year in FY22 for CSL, so in 2023 it will probably be on something like 36 times. 

A PE of 42 times is actually not too bad in the growth or healthcare space where those multiples are quite common and peers are trading on that or higher. Look at Cochlear, ResMed, Fisher & Paykel Healthcare, or other growth stocks like Xero or Afterpay. In that context, CSL is pretty good value. 

But you make a good point, BHP is a hell of a lot cheaper and so is CBA, but you are not comparing apples to apples and there are different risk profiles. CSL can deliver high single-digit or double-digit growth year after year and has done for decades, whereas BHP is trading so cheaply because iron ore prices went through the roof and that's not going to last for decades. We know that will revert. Its earnings aren't maintainable, so you don't want to pay as much for those near-term earnings. 

CBA has had great growth over a long period of time, but it is a bank so it has a lot of financial leverage there in terms of the lending book to shareholder capital. So there is inherently more risk. If things go really wrong; we have a recession, banks can go broke and burn capital, but CSL won't. 

There is a risk. If central banks decide to fight inflation and tighten interest rates, then you will see multiple compression across those growth stocks. We manage that risk across the portfolio by being selective within growth stocks, resources, financials etc and being neutral across the groups. This means we don't have to worry about macro risks and we can focus on the companies individually instead. 

So yes, in that context, CSL looks expensive. But in a world where everything is expensive, it actually looks like pretty good value. 

What is your target price for CSL? 

I would expect CSL's share price to grow in line with its earnings over time. As I said before, that's likely to be high single to double-digit growth. So we would expect 10% growth out of CSL and some decent dividend return, maybe greater if there are some buybacks in there looking forward. 

So we think a range of $330 to $350 in a year's time will be achievable for CSL. 

But it doesn't mean you sell it there, because then you have another year in front of you. 

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