CSL still has upside

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Blood products company CSL is trading around the all-time high its reached in June but it still has analysts recommending that investors put it in their portfolios. Last week, Macquarie Securities issued a report on the company, rating it ‘outperform’ with possible price upside of around 10 per cent in the year ahead.

Macquarie expects that earnings per share will grow by 57 per cent over the three years to 2019/20, at a compound annual growth rate of 16 per cent. It also expects that strong free cash flow will allow CSL to reduce its gearing ratio.

“We see the outlook for immunoglobulin, which accounts for 40 per cent of group revenue, as robust, with industry volume expected to grow at around 7 per cent a year,” Macquarie says.

CSL’s plasma collection centre network, which has expanded more rapidly than rivals’ in recent years, will support volume growth ahead of industry. Between 2012 and 2017, CSL increased its collection centre numbers by around 20 per cent, with the rest of the industry expanding at around 5 per cent.

“We see CSL’s collection network as a key competitive advantage,” Macquarie says.

A turnaround in profitability of the Seqirus division, a flu vaccine company, is also expected to be a driver of earnings. Seqiris lost US$245 million in 2015/16 and Macquarie is forecasting break even in the current financial year and EBIT of US$221 million in 2019/20.

CSL currently trades on a multiple of 29 times consensus forecast earnings per share, representing a 55 per cent premium to the ASX 200 industrials average.

“While current valuations appear elevated, CSL is attractive relative to domestic healthcare peers on a PE growth basis,” Macquarie says.

Its 12-month target price is $146 a share. The stock closed on Friday at $133.96 a share. It reached a high of $137.69 in June, climbing from below $100 in December last year.

The June peak in CSL’s share price coincided with news that it had entered into an agreement to acquire 80 per cent of the plasma-derived therapies manufacturer Wuhan Zhong Yuan Rui De Biological Products Co (Ruide) for US$352 million.

The company said the acquisition would give it a strategic presence in the Chinese plasma fractionation market, a position that would complement the leadership position its CSL Behring business has built up as a provider of imported albumin in China.

It said it saw scope to expand Ruide’s plasma collection capabilities and introduce new products into a market that is growing at 15 per cent a year.

In response to that news, the Motely Fool reported: “CSL’s share price may appear expensive but when doesn’t it? We’ve often said the company is the highest quality business on the ASX and paying up for quality is likely to pay off over the long term.”

Rhett Kessler, the chief investment officer of the Pengana Australian Equities Fund, says CSL is not cheap but it has strong cash flow and conservative accounting policies, which include expensing research and development spending.

Kessler says: “CSL management has underpromised and overdelivered. It has invested ahead of the curve in long-term strategic projects and its products have a reputation for reliability.”

CSL is a global leader in plasma fractionation, which Pengana says is an economically insensitive business.

It has large-scale barriers to entry, which Kessler describes as “a massive moat”.

It is the lowest cost producer in its market globally and its US collection centre network is a “very efficient raw materials source”.

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