Company Overview: CSL Limited (ASX: CSL) is a biotechnology company with a portfolio of life-saving medicines, that consists of vaccines for the treatment of haemophilia and immune deficiencies, along with prevention of influenza. The company uses the latest technologies and has been on track to save numerous lives since 1961. CSL has two businesses, CSL Behring and Seqirus, that offers life-saving products to over 100 countries and employs greater than 27,000 people.

CSL Details

Strengthening Foothold in Pharmaceutical Space & Acquisition Synergies Remains Key Catalysts: CSL Limited (ASX: CSL) is engaged in the development, manufacturing and marketing of pharmaceutical and diagnostic products, cell culture media and human plasma fractions. The market capitalisation of the company stood at ~$123.36 billion as on 20 January 2021. CSL remains on track to enhance its shareholders’ value by a continuous focus on delivering innovative products to people suffering from rare and serious diseases. The year 2020, was marked by a series of investments intended to bolster the next-generation therapeutic areas within the company’s product portfolio. In doing so, the company inked a deal to fully acquire Vitaeris Inc., a biotechnology company. The move will aid to cure long-term rejection in kidney transplantation, using Vitaeris’ late-stage monoclonal antibody therapy. CSL also formed a strategic alliance with Seattle Children’s Research Institute, thereby expanding its stem cell gene therapy portfolio, for the treatment of primary immunodeficiency diseases. In June 2020, the company inked a deal to acquire the exclusive global license rights from uniQure, with an aim to commercialise an adeno-associated virus (AAV) gene therapy program, AMT-061 (etranacogene dezaparvovec; EtranaDez), for the treatment of haemophilia B. As per the agreement, CSL will have the exclusive global right to commercialise AMT-061 upon closing the transaction. All these acquisitions were in line with CSL’s strategy to strengthen its market position as a leading pharmaceutical company.

Looking at the past performance, CSL witnessed a compound annual growth rate of 10.6% and 14.07% in total operating revenue and net profit, respectively, in the time span of FY16-FY20. The company has been investing in new technology and service enhancement. The company is witnessing higher recognition from its customers in relation to CSL’s industry-leading supply performance amid the COVID-19 led disruptions. In addition, with a robust research and development (R&D) pipeline, commercial and operations excellence, global reputation as a leading biotechnology company, the company has delivered an upward trend in its overall results. The company has also witnessed a CAGR growth of 10.7% in R&D investments over a time span of FY16-FY20, depicting its overall focus on innovative new therapies for life-threatening diseases, strategies seeking to bring therapies to new markets and ensuring the continuous improvement of existing products.

Key Trends (Source: Company Reports)

Sneak Peek at FY20’s Key Results: The company provided its FY20 results for the period ending 30 June 2020, wherein it reported an increase in its total revenue of 9% Y-o-Y to US$9,295 million and a rise of 17% Y-o-Y in NPAT to US$2,247 million, on a constant currency basis. As a result, EPS went up to 4.951 US cents, representing a growth of 17% on pcp on a constant currency basis. During FY20, CSL also witnessed a growth of 22% in the sale of Immunoglobulin to US$4,014 million, which was mainly due to strong demand for PRIVIGEN® and HIZENTRA®. The company also declared a final dividend of US$1.07 per share, which was paid on 9 October 2020 taking the full year dividend to US$2.02 per share, up 9% Y-o-Y. An aging population, increasing life expectancy, and the shift of patient care towards lower cost settings, have fuelled the demand for healthcare services. Further, increasing awareness and desire for high quality products are driving the need for a portfolio of quality products, and an experienced management team. CSL has grown to meet these value-added requirements.

FY20 Key Highlights (Source: Company Reports)

Liquidity Position: The company exited FY20 with a cash balance of US$1,194.4 million. The company’s total debt at the end of the period came in at ~US$4,959 million. Operating cash inflow in FY20 came in at US$2488.3 million. The company’s balance sheet remains in a strong position with net assets of US$6,527 million at the end of FY20. CSL remains well-positioned for future growth and remains open to utilise its debt capacity to fund initiatives that are accretive for shareholders' returns.

Debt Facility (Source: Company Reports)

Update on The University of Queensland COVID-19 Vaccine: CSL along with The University of Queensland (UQ) recently updated the market regarding the Phase 1 trial of the UQ-CSL v451 COVID-19 vaccine.  The result has shown that it produces a strong response towards the COVID-19 virus, with a robust safety profile. Further, the results noted no serious negative impact on the 216 trial participants.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 14.4% of the total shareholding. BlackRock Institutional Trust Company, N.A. is the entity holding maximum shares in the company at 3.1%. The Vanguard Group, Inc. is the second-largest shareholder, with a holding of 2.72%.

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics:  In FY20, the company had an operating margin and EBITDA margin of 29.7% and 36.3%, which were higher than the industry median of -468.9% and -219.8%, respectively, representing decent fundamentals. The company’s debt-to-equity multiple in FY20 stood at 0.76x, lower than the FY19 (debt-to-equity multiple) of 0.89x, demonstrating that the company remains on track to pay off its debt liability. ROE of the company stood at 35.7% in FY20, against the industry median of negative 23.6%. 

Key Metrics (Source: Thomson Reuters) 

Key Risk: CSL’s leveraged balance sheet poses risks with total debt of US$4,959 million and a cash balance of only US$1,194.4 million as of June 30, 2020. This indicates that the company needs to be more focused on the cash flow generation front. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile. The company is also exposed to risks inherent in the worldwide pharmaceutical industry, and in specific the plasma therapies industry. Headwinds for the industry consist of government inspection of high drug costs, pricing and competitive stress, generic competition for best-seller treatments, along with major pipeline setbacks.

Further, due to COVID-19, the company expects plasma collections to be impacted. The company is also exposed to other business risks such as research and development/commercialisation risk, and patient safety & product quality risk.

Outlook: The company is making decent progress in market demand, which lays a good foundation to support its 2030 strategy. For FY21, the company expects to deliver net profit after tax in the range of US$2,100 million to US$2,265 million on a constant currency basis. Revenues for FY21 are expected to grow in the range of ~6 - 10% on a constant currency basis. CSL also expects to continue to grow via developing differentiated products and expanding its market presence. The company expects that the demand of plasma recombinant and vaccine products is likely to be robust, particularly for immunoglobulins and influenza vaccines.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: CSL’s stock price has corrected by ~3.57% in the past six months. At the current price, annual dividend yield stands at 1.09%. Currently, the stock is trading below the average of its 52-week high and low level of A$342.75 and A$242.67, respectively, offering an opportunity for share accumulation. On a technical front, the stock of CSL has a support level of ~A$256.46 and a resistance level of ~A$291.78. Despite economic uncertainties, the company has shown various trails to offer decent earnings and remains on track to continue its growth trajectory via synergistic acquisitions. Looking ahead, the company remains well-positioned to manage the rising cost pressure. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit growth (in percentage terms). For this purpose, we have taken peers such as EBOS Group Ltd (ASX: EBO), Mayne Pharma Group Ltd (ASX: MYX) and Ansell Ltd (ASX: ANN). Investors need to consider their appetite for risks versus potential in view of current and previous holdings given the existing trading levels for CSL. Considering the recent developments, optimistic outlook for FY21 and beyond, expected acquisition synergies, along with current trading level, we recommend a “Buy” rating on the stock at the current market price of A$270.93, down by 0.078% on 20 January 2021.

CSL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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