Company Overview: Cochlear Limited (ASX: COH) is a medical device company that specialises in hearing aid equipment, which is implantable for people with conductive hearing loss, mixed hearing loss and single-sided deafness. COH is a Top 50 listed Australian company, with a deep geographical reach in more than 180 countries, and a global workforce of greater than 4,000 employees. The company started to trade on ASX in 1995.

COH Details

COH Rides on Acquisition Synergies & Decent Fundamentals: The company delivered consistent revenue and earnings growth in 1HFY22, with a balanced approach to expand its market presence, continue investment strategies, and maintain a competitive position, thus supporting its growth ambition. The integration of Oticon Medical is in line with COH’s plan to develop next-generation sound processors and services to enable customers to benefit from its technology platform, going forward.

Acquisition Highlights; Analysis by Kalkine Group

Focus on 1HFY22 Key Numbers:

• Rise in Revenues: During the period, sales revenue stood at $815 million, increasing ~12% year over year on a constant currency basis and ~10% on a reported basis. Growth amplified on the heels of robust demand for sound processor upgrades and new acoustic implant products. Cochlear implant units stood at 18,598 in 1HFY22, depicting a rise of 7% on pcp basis, owing to reducing COVID-19 related restrictions in the overall operating theatre capacity. 
• Impressive Net Profit Growth: In 1HFY22, underlying net profit stood at $157.5 million compared to $124.8 million reported in 1HFY21, driven by the strong sales growth and improved gross margin, as well as lower operating expenses. This resulted in the underlying net profit margin of 19% in 1HFY22, ahead of COH’s long-term target of 18%.
• FDA Clearance to Augment Business Revenues: The company received an FDA clearance for Remote Assist for the Nucleus® and Baha® Systems, allowing live video sessions for remote programming, processor setting adjustments, and counselling. The product will be launched across the US in 2HFY22, leading to business growth in this region.
• Liquidity Position: At the end of 31 December 2021, the company’s net cash stood at $505.6 million. Operating cash inflow was $125 million in 1HFY22 compared to a cash inflow of $86.8 million in 1HFY21, sufficient to fund investing activities and capital expenditure. In 1HFY22, the company declared an interim dividend of $1.55 per share, up 35% on pcp, signifying a pay-out of 65% of underlying net profit.

Segmental Highlights; Analysis by Kalkine Group

Key Metrics: In 1HFY22, the company had a gross margin of 75.3%, higher than the 1HFY21 margin of 72.9%. It is also higher than the industry median of 66.6%.

Profitability and Liquidity Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 32.79% of the total shareholdings, while the top 4 constitutes the maximum holding. APG Asset Management N.V. and Baillie Gifford & Co. are holding a maximum stake in the company at 5.51% and 5.22%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:  The company faces stiff competition in the sector from its peers, which may lead to margin pressure in the sale of its products. COH’s line of business makes it prone to the risk of being under the watch of a prudent regulatory purview, which can impact its operations.

SWOT Analysis; Analysis by Kalkine Group 

Outlook: For FY22, the company expects underlying net profit to be in the ambit of $265-285 million, signifying a rise of 13-22% on underlying net profit for FY21. The company remains on track to invest higher in R&D and market growth events to support long-term opportunities. Despite the ongoing disruption led by COVID-19 outbreak, COH remains confident of the resilience of its hearing implant business over the longer term. Further, COH expects to maintain a dividend pay-out to be ~70% for FY22. Growing through organic revenues remains an essential part of the company’s growth prospects.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~7.9% in the past nine months. Currently, the stock has 52-week high and low levels of $257.76 and $178.545, respectively. The stock of the company has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium compared to its peers, considering an increase in the company’s 1HFY22 revenues, and profits, acquisition synergies, geographical expansion, etc. For the purpose of valuation, peers such as Fisher & Paykel Healthcare Corporation Ltd (ASX: FPH), Resmed Inc (ASX: RMD), Nanosonics Ltd (ASX: NAN) and others have been considered. Considering geographical expansion, robust top-and bottom-line growth, enhancing shareholder’s value, decent rise in segmental revenues, synergies from acquisitions, current trading levels, and indicative upside in valuation, we recommend a “Buy” rating on the stock at the closing market price of $228.97, up by ~1.005% as on 4 May 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

COH Daily Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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