Company Overview CSL Limited (CSL) is a biopharmaceutical company that researches, develops, manufactures and markets products to treat and prevent human medical conditions including coagulation disorders, viral and bacterial diseases, bleeding disorders and other diseases. The operational businesses include CSL Behring and bioCSL. CSL has manufacturing operations in the United States, United Kingdom, Germany, Switzerland Bern and Australia Parkville and Broadmeadows.
This week I attended a site visit at the CSL Behring Broadmeadows site. It looks after plasma protein therapeutics. It manufactures and markets a range of plasma-derived and recombinant therapies worldwide. Therapies are used to treat coagulation disorders including hemophilia and von Willebrand disease, primary immune deficiencies, hereditary angioedema and inherited respiratory disease, and neurological issues. It also manufactures immune deficiency product immunoglobulin (Ig). Immunoglobulin is a component of healthy human blood plasma. Some people are born with low levels of Ig in their blood or with an immune system that does not function properly. Such a condition makes fighting off germs and infections difficult. Immunoglobulin therapy replaces Ig that is present in an insufficient quantity. The body’s immune system can then work more effectively. Some of the products in the CSL Behring portfolio include Privigen, Hizentra and Carimune. The site is a 24/7 production facility that resembles the likes of a milk factory. There are numerous stainless steel tanks that are connected via intricate network of steel tubes. Like oompa loompa’s off Charlie and the Chocolate factory, workers are dressed head to toe in protective gear and scuttle around the factory floor. The place is absolutely spotless, including the ceiling. You could almost eat off the floor, it’s that clean. If there was anything contaminating the place, it was me.
On fundamentals, CSL ticks almost all boxes. The stock does lose a few points because of its high PE of 34x, but that’s expected because of its ROE. It shouldn’t be a concern as the company has a very high, stable and rising ROE. Put simply, CSL is very profitable and continues to be. Its dividend is low and should be considered a growth stock. The company’s earnings are forecast to grow in line with industry rates. Overall this makes CSL a high quality, strong, defensive like growth stock. The only downside is that fundamental analysts consider the stock to be overvalued.
Broker Views – 4 Buys and 2 Neutral (Citi has highest target price of $148)
- Ord Minnett has an Accumulate recommendation with a target price of $130.00. CSL recently hosted a briefing where the president of Seqirus (flu vaccine business) said the business remains on track to reach breakeven in FY18 as revenue is boosted by the roll-out of highervalue quadrivalent vaccines and operating costs are reduced. Ords sees potential for the performance of the division to exceed estimates this year in light of the relatively strong ‘flu season’ in the US.
Technicals Since CSL’s HY profit result, the stock has gone on a bumper rally rising from below $100 to $130 in the space of a few months. Whilst the stock is trading with bullish momentum, we all know what happens to high PE stocks when they disappoint. For any reason if CSL disappoints, it could easily pull back to $99 as it did earlier this year. So we think CSL is for the traders not for investors. The downside risk is too great. For traders that buy at these levels, ensure you set a suitable stop loss to exit the minute there is a downturn.
Unconventional View I came away from the site tour more than impressed. The CSL Behring plasma facility was top notch. The amount of blood plasma that passed through the centre was mind boggling 800 kilolitres per year. By and far the plasma business is CSL’s main strength. Demand on average is around 6%-8% but it has been stronger. Plasma collection has been especially strong. Most blood plasma ends up at CSL via Red-Cross centres. CSL is cost-competitive given its manufacturing scale and broad range of plasma products that reduce unit production costs. The company spends big on R&D ($2.3bn) and has years of experience. It is truly a giant in its space, and is one of the three biggest players along with US Baxter International and Spanish Grifols. There three players account for 90% of the US market for immunoglobulin derived products. CSL is the lowest cost producer of plasma out of the three. Just two years ago it bought the Novartis influenza vaccine business for US$275m which was integrated with bioCSL to form Seqirus. It’s the world’s second largest influenza vaccine company and a major partner in the prevention and control of influenza globally. It is a reliable supplier of influenza vaccine for Northern and Southern Hemisphere markets and a transcontinental partner in pandemic preparedness and response. It operates state-of-the-art production facilities in the US, the UK and Australia, and manufactures influenza vaccines using both egg-based and cell-based technologies. CSL is in a unique position. Global plasma supply and fractional abilities are limited. A stable oligopoly exists between the three giants. There are huge barriers to entry for new entrants as the industry is very capital intensive. A plastic bag coated by plasma at atmospheric pressure is used to cultivate cells. Every single bag costs a staggering $12k-$16k. We think CSL will maintain this advantage and will continue to expand. With the Seqirus business, CSL will only strengthen. Seqirus is now the second largest influenza vaccine company in the world. With extensive research and production expertise and manufacturing plants in the US, UK, Germany and Australia, Seqirus is a transcontinental partner in pandemic preparedness. CSL’s is a stock that continues to deliver year after year. Its recent results were robust. Underlying NPAT was up 36% to US$806m thanks to blood fractionation. An interim dividend increased to US$0.64. CSL Behring remains the company’s core stronghold. It recorded sales up 18% to US$3.0bn boosted by rising demand for immunoglobulins. These help boost one’s immune system. The division manufactures three products Hizentra, Privigen and Carimune. Sales of Privigen were up 34%. Specialty Products were up 25%, and albumin sales increased 19%. For CSL’s business outlook, it expects solid ongoing demand particularly for immunoglobulins, specialty products and albumin. CSL is well positioned with the recent launches of its differentiated innovative recombinant coagulation factor products and it has consistently stayed one step ahead of demand by increasing the number of US collection centres by 18% a year. One of CSL’s competitive advantages is its constant, reliable source of plasma. With over 160 collection centres, it means there is enough supply of plasma so that manufacturing can keep up with increases in demand for antibodies, while its competitors struggle.
The real question is: Would you buy CSL at these lofty levels? The short answer is “possibly”. When CSLwas trading around $80, you would have said it was expensive. It’s now trading at $130 and it’s still expensive. But that doesn’t mean it can’t continue along its solid upward trend and hit $200. Blackmores (BKL) did it back in 2015. It can. The sole reason we think this is possible is because CSL’s fundamentals are rock solid. Looking at the chart below, its EPS has been increasing. It not only has a competitive advantage, but it is one of the biggest players in its industry. It has a robust balance sheet and with an aging population the demand for its products will only continue to rise. It trades on a ROE of 43.39% which is forecast to rise to 49.83%. There was a point where the market was worried that Seqirus would turn out to be a lemon, but this proved wrong. Seqirus has turned around and has been one of CSL’s biggest bets that has paid off. The acquisition has boosted CSL to number two in flu vaccines in the US. This adds a powerful second earnings stream to CSL’s core plasma business. Since CSL’s HY profit result, the stock has gone on a monster rally rising from below $100 to $130 in the space of a few months. Whilst the stock is trading with bullish momentum, we all know what happens to high PE stocks when they disappoint, they drop like a falling bus. For any reason if CSL disappoints, it could easily pull back to $99. Whilst CSL has many defensive qualities, it’s a growth stock. It’s for the traders not for investors. The downside risk is too great. It’s not a stock you can simply set and forget. Its yield is also thin. For traders that buy at these levels, ensure you set a suitable stop loss to exit the minute there is a downturn. Otherwise jump on and enjoy the upward ride.