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. It operates via segments, namely cochlear implants, services, and acoustics. The company was listed on ASX in December 1995.

COH Details

Growing Customer Base & Robust Product Adoption Aids COH: The company remains on track to invest higher in R&D, in order to develop its latest technology, thus obtaining regulatory approvals for many new products and services. COH invested ~$99 million in R&D, which accounted to 12% of total sales revenue in 1HFY22.   It obtained FDA approval for Remote Assist for the Nucleus® and Baha® Systems, thus strengthening its overall leadership position. The product will be launched across the US in 2HFY22, leading to business growth in this region.

Glimpse at 1HFY22 Key Segmental Highlights:

• Cochlear implants: In 1HFY22, the company’s sales revenue from this segment increased 2% on a constant currency basis and 1% on a reported basis YoY to $457.9 million. Cochlear implants accounted for ~56% of total sales revenues for 1HFY22. Cochlear implant units increased 7% year over year, owing to robust growth in emerging markets, along with new product launches. For the emerging markets, unit volumes went up a whopping 30%.

• Services (sound processor upgrades & other): Revenue from this segment increased 21% on a constant currency basis and 19% on a reported basis YoY to $ $256.5 million, supported by the growing recipient base, higher connectivity, and engagement with the recipient, and next-generation sound processor upgrade. Notably, the segment accounted for around 32% of total sales revenues in 1HFY22.
  

• Acoustics: During the period, the company’s sales revenue from the Acoustics segment rose 40% on a constant currency basis and 38% on a reported basis YoY to $100.9 million. This segment accounted for ~12% of total sales revenues for 1HFY22. The positive results are primarily due to robust demand for new products and CE Mark approval for its Osia® 2 System achieved during 2HFY21, with the rollout across Western Europe.

Financial Highlights; Analysis by Kalkine Group

Key Metrics: In 1HFY22, the company had an EBITDA margin of 31.5%, higher than the industry median of 24.7%. ROE in 1HFY22 stood at 9.9%, higher than the industry median figure of 5.2%.

Leverage and Liquidity Profile; Analysis by Kalkine Group 

Latest Key Updates:

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 the risk of COVID-19 closures, restricted hospital access, risk of a turnaround in the performance of a loss-making business acquisition, and supply chain bottlenecks in the global markets. 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.

Outlook: The buyout of Oticon Medical is expected to aid COH with greater scalability, higher investments in R&D and market growth activities. Oticon Medical is expected to add annual revenues of A$75-80 million, with a target of a long-term net profit margin of 18%. The acquisition will be funded from existing cash balances of COH and is expected to close in 2HFY22. Further, COH expects a dividend payout to be ~70% for FY22. COH confirms the underlying net profit guidance between ~$265 - ~$285 million, up by ~13% - ~22% Y-o-Y in FY22. To conclude, the company remains on track with a balanced approach to expand its market presence, continue investment strategies, and maintain a competitive position, thus supporting its growth ambition.

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 ~8.3% 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 the acquisition synergies, geographical expansion, decent outlook, 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 the current trading levels, decent growth in revenues and underlying NPAT in 1HFY22, geographical expansion, enhancing shareholder’s value, decent rise in segmental revenues, expected revenue growth in FY22, and indicative upside in valuation, we recommend a “Buy” rating on the stock at the closing market price of $217.75, up by ~1.976% as on 8 June 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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