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CSL's strategy of building out its plasma collection centres even when there was a period of oversupply was paying off.

 

"Many of CSL's largest competitors have experienced constraint in terms of supply into this space and CSL is well-placed to grow share," [an analyst] said. "Five, six, seven years ago, people said immunoglobulin would slow down and return to a normalised period. While there was a period of oversupply, CSL stuck to its strategy of rolling out collection centres in the US, investing for growth and securing the volume for themselves.

 

"When competitors were holding back because they lacked vision for five years down the track, CSL invested âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’‚¦ and now we see year after year of demand outstripping supply and the other competitors just don't have enough capacity to keep up with the accelerated demand."

 

Immunoglobulin therapies are used to treat conditions such as Kawasaki disease, Guillain-Barre syndrome, lupus, chronic inflammatory demyelinating polyneuropathy and immune deficiencies. The diseases range from chronic to life-threatening conditions.

 

A Credit Suisse note on CSL revealed the growth in demand for immunoglobulin in the three biggest global markets of the US, Australia and Canada was tracking at 9-12 per cent, above the historical norm of 6-8 per cent, due to increased awareness of the diseases it's used to treat, ageing patients and increased dosages. To meet the growing demand, an additional 80-90 plasma collection centres would need to be opened each year between now and 2025.

 

In July, major US hospital Massachusetts General activated its Incident Command System, usually used for major disasters such as terrorist attacks, to address the immunoglobulin shortage. In a statement about the shortage, the hospital said it had been forced to cancel some patient appointments due to the lack of immunoglobulin and that the shortage could persist into 2020....

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If it hadnâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢t been for index heavyweights such as CSL, Macquarie Group, Transurban and Goodman, it would have been near impossible for the ASX 200 to reach for a new all-time high in 2019. Yet, the sad fact remains most investors donâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢t own shares in CSL, though some may have owned shares at some point throughout those 25 years.

 

The usual explanations heard are âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“too expensiveâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’‚ and âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“cannot get my head around itâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’‚ÂÂ. This goes both for the self-managing retail crowd as for professional fund managers. The logical observation to make here is that everybody who bought shares in CSL, no matter when or at what price, is today sitting on a profit.

 

With the shares trading on a FX-adjusted, forward-looking estimate of about 37 times FY20 earnings per share, it will nearly always be too âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“expensiveâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’‚ for typical value-seekers, while the implied 1.2 per cent dividend yield is too low for the income-hungry.

 

Maybe, without owning shares in the company, there are some valuable lessons to be learned from CSL for investors of all kinds and various levels of experience.

 

In 2019, all three major external factors have ultimately aligned to push CSL shares to a new all-time high. This is not necessarily always the case. When bond yields rise strongly in a short time, as they did in late 2016, CSL stock temporarily faces a formidable headwind.

 

When the dollar strengthens against foreign currencies, this also tends to create a headache, and similar underperformance follows when investors temporarily favour cheaper-looking, beaten-down cyclicals like they did when the GFC bear market ended in 2009-2010.

 

Another complicating matter is the fact that CSL is now the number three index component in Australia, which makes the stock more susceptible to general market sentiment. Whereas in the past the shares were at times able to not necessarily follow general market sentiment down, such idiosyncratic behaviour is a lot more difficult when large sell orders aiming to replicate the index hit the local market.

 

Most importantly, however, is that 25 years from the past show that whatever external factor is holding back the stock at any given point, as long as the business continues to perform, its shares will ultimately perform, too. As such, every period of weakness or stagnation in the share price ultimately proved a profitable entry point.

 

This takes us to the operational reliability that has become one of the trademark characteristics of CSL. How come most businesses cannot replicate the solidity and sustainability of CSL? Never a profit warning. Seldom an operational disappointment. This company, throughout various managers, has an almost alien-like track record in a sharemarket that regularly shocks through corporate failures and mishaps.

 

The answer is two-fold.

 

ââ€â€Â First, CSL has managed to transform itself into the highest-quality benchmark for the plasma industry globally. It operates collection centres more efficiently than anyone else, which means it can open additional centres quicker and earn its investments back in a shorter time.

 

ââ€â€Â Second, in line with general industry practice, CSL invests about 10 per cent of annual revenues back into its business to expand through new centres and to constantly develop new products. It has a rich history for discovering and developing new therapies and medical solutions, which is necessary in the fast-moving and ever-evolving biotech-medical world...

FN Arena
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Credit Suisse ups CSL price target by 24pc

Luke Housego

Credit Suisse has raised its price target for CSL to $305, up 24 per cent, citing the pricing growth opportunity in Europe for the company's IG segment.

"All plasma participants have noted a tight IG market where demand is currently exceeding supply," the analysis noted.

 

Retaining its "outperform" rating on the stock, the investment bank's analysts increased its earnings per share estimate by 2 to 3 per cent across the forecast periods to the 2022 financial year.

 

"While CSL's valuation may be viewed as demanding, trading at 38.4 times 12 month forward price to earnings ratio and at a 90 per cent premium to ASX200 Industrials (ex-financials), in our view, the valuation is justified given CSL's strong market position in a niche industry that has robust fundamentals," the analysts said.

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CSL does not fit the mould of the typical company in the top 200 which pays out 60 to 70 per cent of earnings in dividends. CSL's dividend yield is about 1.5 per cent and its payout ratio is less than 50 per cent.

 

"We are not a high divvy stock not because we don't want to pay a high dividend," CEO Paul Perreault says. "We want to reward the shareholders, but we also want to balance that against the capital demands because we're a highly capital-intensive company.

 

"When you look at the size of our facilities and what we have to do, these are massive biologic manufacturing facilities with a lot of stainless steel and filtrators, lyophilisers, pasteurisers and other big, heavy equipment. "We also want to make sure that the R&D investment and the expansion of the translational medicine through our commercial activities is all being invested in."

- trading at 40x forward earnings

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With CSL having come out of the CSIRO stable and having unheard of success from listing, I have to wonder why the Kiwis didn't take a leaf from the same book by listing something from their Crown Research Institute suite. The universities have all set up commercialization arms but as far as I know, not the CRIs. Which is surprising since they once had an Australian serial entrepreneur as the CEO.

 

Something must be missing in the equation because I can't believe the money spent over the last 20-30 years has yielded nothing the market is interested in.

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