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Cochlear Video


 

Stock Of The Day - Cochlear (Expensive)

Cochlear Limited (COH) came out with its 1H FY15 results that was driven by sales momentum for products launched during FY14. The Company reported total revenue of about $438.3 million indicative of 18% surge over total revenue of 1H FY14. Net profit after tax of $71.4 million which is indicative of 240% rise (up 94% excluding 1H FY14 patent dispute provision) was noted.


Financial Results (Source – Company Reports)

Excluding the FX contracts, the sales were reported to be 17% up to $440.5 million. 1H FY15 sales rose 15% in constant currency. 16% surge in the implant sales revenue (including sound processor upgrades) to $383.0 million as compared to the prior year was noted. In constant currency, the implant sales revenue went up 14%. COH reported 98% rise in sales of sound processor upgrades to $82.2 million. Nucleus® 6 Sound Processor was the market frontrunner that helped the revenue from sound processor upgrades to double. Since the launch of Nucleus® 6, about 15,000 recipients have upgraded.

The Company reported that the Cochlear implant (CI) unit sales were 11,689, which was in consensus with 1H FY14, i.e., flat result with no surge. Developed countries illustrated robust CI unit growth with Western Europe having a 8% rise and North America having a 17% rise. Nonetheless, the feeble CI unit tender sales in developing countries pulled down the results achieved in developed countries. The Company has scheduled Nucleus Profile launches for 2H FY15.


Cochlear Implant (CI) Unit Sales (Source – Company Reports)

Bone Anchored Solutions, including acoustic implant sales of $57.5 million went up 25% and 22% in constant currency. This was attributed to the effect from the Baha®4 and Baha Attract Systems.



1H FY15 Regional Split of Sales (Source – Company Reports)

The Company has reported record 1H FY15 Americas sales of $195.3 million up 30% (up 26% in constant currency) and 1H FY15 EMEA sales of $181.6 million, up 7% (up 7% in constant currency). In fact, the growth has been said to be biased to Western Europe with sales up 12% in constant currency. In Asia Pacific, 1H FY15 sales has been $63.6 million, up 10% (8% in constant currency). The Company has signed a tender for delivery to China of about 1,900 CI units in 2H FY15.


Products (Source – Company Reports)

Depreciation of Australian dollar against the United States dollar helped boosting the foreign sales upon translation into AUD. In view of the foreign exchange and currency translation, COH could make a benefit in sales by net $7.3 million. This was however negatively impacted by the FX contract losses which were reported to be of the order of $2.2 million for 1H FY15 compared to a loss of $5.9 million in 1H FY14. The COGS/sales were 28.9% compared to 32.8% for previous corresponding period. Research and development was 14.0% of total revenue which was down from 17.5% for 1H FY14.

The Company has conveyed that it aims to focus on regulatory approvals in FY15 with regards to products including but not limited to Nucleus Profile implants, Wireless Accessories for Nucleus® 6 etc.


1H FY14 – 1H FY15 NPAT (Source – Company Reports)

What we note is that the Company has reduced its interim dividend by 29% from 127 cents of 1H FY14 to 90 cents in 1H FY15, although this goes as per the earlier guidance. Then the net profit gained benefits from the lower OPEX but mixed geographic performance was another point of consideration. The Company witnessed flat unit sales growth with a decline of 6% successively versus 2H FY14. Uncertainty prevails around the CI unit growth. Working capital was crushed by higher inventory levels ahead of the Chinese tender and two European tenders (due for delivery during 2H FY15). Owing to the aforementioned reasons, earnings growth is likely to be sluggish through FY17, and in fact till the time the Company launches its next processor. The trend of robust emerging market sales does not seem to continue in view of difficult market conditions. The guidance so far provided looks subjective without specifics.


COH Daily Chart (Source - Thomson Reuters)

We believe that the stock is EXPENSIVE at the current price of $90.36.