Upgrades driving upgrades

RESULTS

Need To Know

• FY23 sales of $1,956m ahead of consensus, but net income of $305m (at the top end of guidance) in-line with the market after higher reinvestment impacted margins
• Strong operational performance driving FY24 net income guidance of $355-375m, up 16-23% (~5% above consensus at the midpoint)
• Momentum into FY24 driven by market share gains and continued device upgrades sees us reaffirm our Buy rating

Investment Implications

Sales growth was seen across all business units, with revenue up 16% (in constant currency) to $1,956m (vs ~$1,854m expected), with 2H seeing 24% growth. Overall market growth, improved clinical capacity, market share gains and Covid catch-up surgeries all contributed to the strong figure. Underlying net profit was up 14% to $305m (in-line with consensus), at the top end of the guided range, with underlying margins of 17%, fractionally below the long-term target of 18% driven by the decision to lift growth investments as 2H sales momentum increased.

Implants revenue increased 17%, with strong growth across both developed and emerging markets, driven by demand for the Nucleus 8 Sound Processor. Clinical capacity constraints stabilised, with indications that much of the remaining surgical backlog was cleared during FY23. We expect some slowdown in growth post clearing the backlog, however still foresee market share gains and price increases contributing to a solid FY24 outcome.

Services revenue was up 14%, driven by upgrades to the Nucleus 8, where the 1H performance was impacted by the 'anticipated launch' of the product, which is now seeing strong uptake. Acoustics revenue up 15% was driven by a recovery in surgery volumes, and the Osia 2 System gaining momentum. The Baha 6 Max also continued to generate demand for upgrades across all regions. Acoustics growth rates are expected to fall through FY24 with a smaller contribution from Baha 6 Max upgrades after a strong FY23.

FY24 is set to be another year of solid growth for COH, with net income set to increase 16-23% to $355-375m. The balance sheet remains strong with net cash of $556m, supporting a strong dividend and ongoing share buyback with the aim of reducing the cash balance to ~$200m 'over a number of years'. Market growth rates should drive high single-digit growth in implants over the year, with new products seeing continued strong demand.

Investment View

COH’s continued market leadership should see it retain and grow its market share. The strong FY23 result and FY24 outlook, backed by key product innovation should see sustained earnings upgrade momentum. Whilst it is expensive at ~44x PER, we consider COH a long-term holding and we retain our Buy recommendation.