Was this company's profit downgrade in June a sign of worse to come?

Market darling CSL (ASX: CSL) caught most by surprise when it announced a profit downgrade in June this year. The response was swift with share prices tumbling 15%.

While the rationale behind the slashed forecast was due to higher-than-expected foreign currency headwinds, many feared that it was a sign of challenges ahead for the plasma giant. 

Was its market-leading plasma business, responsible for the bulk of earnings, failing to return volumes post covid? 

Had the acquisition of iron-deficiency treatments business Vifor been more costly than predicted?

Today's full year report was in line with revised expectations. It's worth pointing out that plasma volumes were up 31%, to record highs, while commentators will continue to monitor how CSL manage and overhaul Vifor.

Anna Milne, Senior Investment Analyst for Wilson Asset Management, notes that the results offered reassurance for investors that CSL's market dominance and ability to innovate and grow is far from over. There is, after all, much to be positive about in CSL's existing product base and pipeline.

"CSL is a high quality name with proven ability to grow through the cycle. They have a number of levers over the medium term; Behring yield initiatives, CSL112 and continued execution of Vifor to name a few," Milne says.

In this interview, Milne shares her insights on the results, the outlook for CSL and whether the blue-chip remains a buy, hold or sell.

Note: this interview took place on Tuesday 15 August 2023. CSL is one of the top 20 holdings in WAM Leaders Ltd (ASX: WLE).

CSL full year key results

• NPATA (underlying profit) $2.61bn, up 10%
• Revenue $13.31bn, up 31%
• EBIT per division
• Behring $3.79bn
• Seqirus $1.08bn
• Vifor $921m
• Cashflow from operations $2,601m, down 1%
• Research and development expenses $1.23bn, up 22%
• Plasma volumes up 31% (with cost of collection down 14%)
• Dividend per share $2.36, up 6%
• FY24 ASIC guidance of $2.9-3bn underlying profit at constant currency (13-17% growth) and revenue gains of 9-11%.

Key company data for CSL

MarketMeter research ranks CSL in the top 10 ASX-100 companies for capital management.

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

The result was pre-reported so it was unsurprising, but confirmed the core businesses remains intact - it’s just the Behring margin recovery that is taking a little longer than anticipated.

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

Appropriate, up ~4%. 

The downgrade in June came as a big surprise which was reflected in the share price move at the time, and today has brought some comfort that CSL is still very well positioned for strong growth over the short, medium & long term. 

I don’t expect earnings expectations will change on the back of this result, so it is a small relief rally.

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

The detail around yield improvements has provided some certainty, as this is the first time this has been formally flagged in an earnings presentation. The detail on capex stepping down was also interesting, expected to be 30% lower year on year, as CSL has completed some large capacity projects and is moving from a collection centre rollout story to a yield maximisation story. This will be positive for ROIC (return on invested capital).

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

Hold. 

While earnings growth is strong, and the valuation isn’t stretched, from here the pipeline of near-term catalysts that may drive either earnings upgrades or a multiple re-rate is light.

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?

CSL is a high-quality name with a proven ability to grow through the cycle. They have a number of levers over the medium term; Behring yield initiatives, CSL112 and continued execution of Vifor to name a few. 

The biggest risks, albeit well known include the competitive threat of FCRNs following the release of ArgenX’s phase 3 ADHERE data release, Vifor’s Ferinject coming off patent in Europe in October, and CSL112 top-line data not meeting expectations next calendar year.

Australian Healthcare overall is well positioned for the year ahead. The greatest risk is not to earnings or management’s execution, but rather a continued “risk on” soft landing market sentiment which will see the sector underperform the broader market.

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

We are more cautious on the market in general. 

The performance across risk-on sectors over the last few months has been dramatic. Over 3 months housing-related stocks are up 15%, tech is up 14%, gold stocks are down 12%, defensives and bond proxies are down 7%. 

While undeniably the outlook is more positive than it was three months ago, this feels to us like an over-correction and we are not out of the woods of the impacts of this hiking cycle yet.

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