csl to rebound, page-19

Where's The Value In CSL?
FNArena News - August 20 2009

By Chris Shaw

A solid result with few surprises is the general broker reaction to the full year profit announcement of flu vaccine and blood products group CSL (CSL), as net profit of $1,145.9 million broadly met or slightly exceeded most estimates in the market.

One highlight of the result, according to Bank of America Merrill Lynch, was the signs of margin leverage emerging in the group's Behring division. BA-ML also likes the strength of the company's balance sheet given there is around $1 billion in available acquisition funding. As JP Morgan points out, this amount is after a $1.5 billlion share buyback set for the next year or so.

Looking forward, JP Morgan takes the view earnings guidance for FY10 of a result between $1.0-$1.1 billion is conservative given guidance also suggests 12% constant currency earnings growth for the Behring division. Overall the broker expects earnings growth in FY10 of 16% followed by around 9% growth in FY11 before a jump back to 16% growth in FY12. These forecasts support its view concerns over potential oversupply in the plasma market have been overblown.

Another positive from the result, according to Southern Cross Equities, is it showed the company continues to step up its new product research and development program, which include potential new uses for Gardasil and the possibility IVIG proves an effective agent in treating Alzheimer's Disease. As well, the broker sees scope for demand for Privigen to increase given its success on FY09, while Vivaglobin is also opening up new markets for the company.

Given such an outlook, Southern Cross expects earnings growth in the order of 20% in FY10, which the stockbroker suggests would support a higher earnings multiple than the 16 times on which the stock is currently trading. Southern Crosse has lifted its earnings forecasts post the result, with FY10 up by 16%, and in earnings per share (EPS) terms now expects 212.6c in FY10 and 232.8c in FY11.

By way of comparison, Macquarie is forecasting EPS of 204.9c in FY10 and 235.8c in FY11, while JP Morgan's forecasts are 197.6c and 215.6c and Citi is at 200.3c and 229.4c respectively. Consensus forecasts according to the FNArena database stand at 202.1c and 232.2c respectively.

With general agreement on the solid earnings outlook the question for the stock becomes one of value and here there are some dissenting views. Citi, for example, has downgraded to a Hold rating post the result, arguing recent share price gains (the stock has put on around 10% in recent weeks) means the value equation is not as favourable as was previously the case.

Macquarie makes the same move in downgrading to a Neutral rating as while it is happy to pay a premium for the company's earnings growth, Macquarie suggests the current premium is simply too high. Others are more bullish however, JP Morgan sugesting a 12-month forward price to earnings ratio of around 17 times is reasonable for the earnings growth on offer, particularly as it sees guidance for FY10 as conservative.

As previously noted, Bank of America Merrill Lynch is similarly positive given the margin leverage it sees emerging in Behring, while Credit Suisse also sees earnings guidance as conservative and on that basis takes the view the market is undervaluing the stock.

Overall the FNArena database shows the stock is rated as Buy six times and Hold four times, with an average price target of $37.99, up from $37.24 prior to the result. Southern Cross Equities (not part of the standard FNArena universe) has a revised price target of $40.00.

Shares in CSL today are weaker and as at 12.10pm the stock was down $1.16 at $31.96. Over the past year the stock has traded in a range of $26.85 to $41.97.