Short-changed

TRADING UPDATE

Need To Know

• FY23 guidance reaffirmed to meet the top end at constant currency, however with increased FX headwind (US$230-250m vs US$175m)
• FY24 guidance weaker than the market expected, with NPATA growth of 13-18% vs ~20% expected
• CSL Behring recovery likely longer dated, with margins returning to pre-Covid in the ‘medium term’ (3-5 years)

CSL’s update was not as positive as the market was hoping, and whilst constant currency guidance for FY23 was retained and skewed towards the top end of the range, additional FX headwinds, mostly impacted by the British Pound and Chinese Yuan, were revised up from USD$175m to USD$230-250m, leaving CSL short-changed. 

Behring margins are taking longer to recover than anticipated. This is key issue for FY24E earnings. CSL has implemented efficiencies such as moving to part-time workers and improving the donor experience through technology which has helped bring the cost per litre down 15-20% from its peak 9-12 months ago. Whilst CSL expect continued improvement, it noted that it does not anticipate donor fees reverting to pre-Covid levels, with inflation still being a factor, noting that it will need to continue utilising other drivers to improve margins. CSL expects to return to pre-Covid margins in the ‘medium term’ (3-5 years) which is longer than what the market was anticipating, hoping for a recovery by FY25.

FY24 guidance therefore was below market expectations, with constant currency NPATA growth guided to be between 13-18%, compared with the ~20% the market was expecting. Guidance includes the commercialisation of Hemgenix (which also impacts higher amortisation of acquired intangibles) as well as improving plasma yields and margins. CSL did not reveal as much information as expected given it is too close to the FY23 results, but there is a readthrough for weakness in the Vifor division, with higher generic brand sales impacting growth.

Investment View

The downgrade to market expectations is disappointing given the increasing optimism in improving margins from lower donor fees and operating efficiencies, as well as new product launches and price increases. We expect the market to downgrade FY24 and outer years earnings by mid-single digits.

We expect CSL to continue to grow earnings in the high teens over the next 2-3 years driven by continued improvement in plasma collections and margins, albeit slightly longer dated than previously expected. If CSL can continue to execute its strategy and effectively integrate the Vifor acquisition synergies, earnings growth can remain elevated for the next 3-5 years. We retain our Buy rating.