CSL Limited
ASX Ticker: CSL
Recommendation
Our BUY rating for CSL Limited (CSL) is due to the
expected prolonged growth in the healthcare sector, the
improving business environment and stable, recurring
cash flows. Using a discount rate of 10.6% to discount its
FCFE, we arrive at a price target of $68.92, a 18.89%
upside from its current share price.
BUY
Market Data
52-week high
52-week low
Previous Close
Market Cap (m)
Outstanding Shares (m)
$64.70
$37.69
$57.97
$28,509
491.8
..
14 June 2013
● Since first listing its shares on the Australian Stock
Exchanged in 1994 for 83 cents, CSL share price has
soared to a high of $64.70 in 2013.
● It’s dividends have been continually growing over the
years, with a significantly improvement of 39% in the
interim dividend paid during the current financial year.
● Value of the shares are increasing due to the $900 million
buyback taking place.
Share Price Movement
● CSL is well positioned with the AUD expected to continue
70
to fall. With almost 90% of its revenue generated from
offshore markets, it will benefit from the sustained weaker
exchange rate.
60
50
40
● The aging baby-boomers population will prove
30
favourable for CSL as the demand for healthcare products
grows.
20
10
CSL
0
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Company Overview
CSL Limited (CSL) is a
biopharmaceutical company that
researches, develops, manufactures and
markets products to treat and prevent
serious human
medical conditions. The operational
businesses include CSL Behring
(incorporating CSL Plasma) and bioCSL.
The Company has manufacturing
operations in the US, Germany,
Switzerland and Australia.
● Control of supply, scale of operations, and integration of
services from blood collection to product manufacture
gives CSL a competitive advantage. Its reputation in the
industry is well established, with CSL being a powerful
global brand due to its reliable quality control and
continuity of supply.
● With low risk of new market entrants, CSL will maintain its
profitability.
● Due to ideal economic and industry environments CSL’s is
expected to grow in double digit figures.
● Its debt to equity ratio of 32.12, which is below the
industry average, provides reassurance to it’s investors of
its financial stability.
Business Description
CSL is one of the top three companies in the Biotechnology &
Pharmaceutical Industry. It is primarily engaged in developing,
manufacturing and marketing biopharmaceutical products
mostly derived from immunoglobulins, a constituent of blood
plasma.
Sectors Revenue Generated
17.92%
The Commonwealth Serum Laboratories was established in
Australia in 1916 to service the health needs of a nation
isolated by war. CSL Limited was then incorporated in 1991. It
held it’s initial public offering (IPO) on the Australian Stock
Exchange in 1994. CSL has created global scale through
acquisitions in 2001 and 2004.
2.99%
79.09%
The company generates the majority of its revenue through its
CSL Behring segment1. CSL Behring is a leader in the plasma
protein therapeutics industry and its products are used around
the world to treat rare and serious diseases.
CSL Behring
Intellectual Property Licensing
Other Human Health
Industry Analysis
CSL is one of the top 3 biggest industry players, along with
Baxter International of the U.S. and Grifols of Spain. Within its
Australian GIGS Industry Group (Biotechnology and
Pharmacuticals) CSL is by far the top company. Its free cash
flows as the end of 30 June 2012 far surpass that of its
competitors2.
Free Cash Flow to Equity ($ millions)
The industry has further potential for growth due to the
ageing population and as CSL is already positioned well, it will
benefit from the greater demand for healthcare products.
GI Dynamics, Inc
Starpharma
Holdings Limited
Pharmaxis Ltd
Company Analysis
Mesoblast
Limited
CSL Limited
$0
$500
$1,000
CSL Limited
Mesoblast Limited
Pharmaxis Ltd
Starpharma Holdings Limited
GI Dynamics, Inc
$1,500
With decades of experience, CSL is in a prime position to
maximise the benefits of the growing demand for healthcare
products. CSL’s current CEO Dr Brian McNamee, who has run
the company for the last 23 years, will be retiring in mid-June
2013. McNamee has transformed the company into a billion
dollar global giant. He will be replaced by current President of
CSL Behring, Paul Perreault. This departure has been well
planned for with this change taking place over the last year. I
believe there is no concern in regards to this change, and CSL
will continue to be managed alike.
Dividend Policy
Over the past two years, CSL has paid out a total dividend of
80 cents (2010-11) and 83 cents (2011-12)3.
Dividends rose consistently from 1994 to 20054, but we can
see a sharp incline in 05/06 when CSL paid a special dividend,
along with a significantly greater final dividend. CSL’s dividend
is still steadily on the rise as their profits continue to grow.
Historical Dividends
The 2012-13 interim dividend of 50 cents has grown 39%
compared with the 36 cent interim dividend paid in 2011-12.
This indicates that the dividend for 2012-13 could reach
approximately $1.15 per share if its final dividend grows at this
rate.
60
50
40
30
20
CSL has no existing dividend payout policy, but previous year’s
show us that they pay out approximately 45% of their NPAT in
dividends5.
10
0
According to CSL’s dividend yield for financial year ending 30
June 2012, they returned 2.55% in dividends relative to their
share price. The Healthcare industry has an average current
dividend yield of 2.8%, which indicated that CSL is only slightly
below the market standard.
Cents per share
The company also pays cash to its investors through share
repurchases currently taking place. The company intends to
buyback $900 million worth of its shares, which will in turn
boost the value per share.
FY10/11
FY11/12
NPAT (m)
$940.60
$982.60
Average Shares on issue (m)
547.16
518.32
EPS
$1.72
$1.90
Interim Dividend
$0.35
$0.36
Final Dividend
$0.45
$0.47
Annual Dividend
$0.80
$0.83
Average Share Price
$34.30
$32.50
Dividend Yield
2.33%
2.55%
PE Ratio (times)
19.95
17.14
Valuation
Using a discount rate of 10.6% [β=0.6, Rf=3.39%, Rm=12%]6
the value of the company is calculated to be $34,029,731,9318.
The weighted average shares outstanding have been
calculated for the financial year ending 30 June. A price per
share of $68.92 was obtained which is a 18.89% upside from
its current price. This shows that the intrinsic value of CSL is
undervalued and it would be beneficial to buy at the current
price in the hopes of making potential gain.
Terminal Value Assumptions
Constant Growth Rate7
Discount Rate
7.5%
10.6%
VAL UT AT ION S UMMAR Y
2011
FCFE
$478,819,000
P V of F C F E
$432,928,571
Value of C ompany
$34,029,731,931
S hares Outs tanding
493,731,343
P ric e P er S hare
$68.92
2012
$1,151,900,000
$941,682,553
T erminal Value
$39,944,919,355
$32,655,120,806
Growth Potential
Economic Analysis
Countries Revenue Generated
as at 30/06/12
13.04%
Global business conditions remain mixed, with global growth
expected to expand slowly in 2013 due to uncertainty in
Europe and a recent slowdown in some emerging markets.
The US economy continues to recover with consumer
spending and job growth rising. The outlook in Australia is
improving due to reasonable growth in earnings, ongoing low
interest rates and strong price momentum from offshore. The
weakening of the Australian dollar is benefiting businesses
with offshore revenues. Looking ahead, further gains appear
possible given ongoing low interest rates and the prospect of
further gains in the US as its economy recovers.
Australia
38.46%
Germany
14.69%
Rest of world
Switzerland
USA
30.62%
3.18%
CSL’s operations are based globally, with a minor proportion of
costs in Australia, but a majority of revenues are in offshore
markets. With 86.96% of its revenues being generated in
foreign countries9, and the AUD expected to continue to fall,
defensive stocks with foreign earnings are key winners.
Therefore, CSL is expected to benefit from this as a sustained
weaker exchange rate would imply a higher Australian dollar
fair value.
CSL is well positioned for future growth as it has two-thirds of
its potential consumer base is located in emerging markets,
and should see a further boost is earnings growth as these
markets develop. Market conditions are also favourable for
albumin and immunoglobulin, which is commoditised in the
US. High demand in Asian markets has led to elevated prices,
which will ensure strong sales and earnings from CSL.
Industry Analysis
Timeline
2000 - ZLB Bioplasma Established
In June 2000 CSL signed an agreement to
acquire the plasma fractionation assets and
business (ZLB).
2001 - ZLB Plasma Services Established
2002 - Expansion of Parkville Influenza
Plant
2003 - CSL's thiomersal-free Influenza
Vaccine Launched
2004 - CSL Goes Global
CSL completes the acquisition of Aventis
Behring, combining it with ZLB Bioplasma
to create ZLB Behring, now known as CSL
Behring, a global leader in plasma
therapeutics.
2005 - GARDASIL® – A Vaccine Against
Cervical Cancer
2006 – CSL acquires Zenyth Therapeutics
and Vivaglobin® approved in U.K. and
U.S.
2007 - Privigen® approved in the U.S.
2008 - Privigen® launched in the U.S.
2009 – CSL responds to the H1N1
influenza pandemic
2010 - Hizentra® launched in the U.S.
Source: CSL Limited
Healthcare industry
The Healthcare sector holds great opportunities driven by the
aging population in developed countries, increasing demand
for sophisticated therapies and care systems, and rapidly
advancing health technologies. The sub-sector of
Biotechnology & Pharmaceutical’s has great potential for
growth as the need for continued development of vital
remedies is infinite. This industry is considered defensive and
will perform well regardless of the economic cycle.
Competitive advantage
CSL develops, manufactures and markets biopharmaceutical
products. It maintains control over its core ingredient, blood
plasma. The blood plasma industry has consolidated into a few
fully-integrated global suppliers. Control of supply, scale of
operations, and integration of services from blood collection to
product manufacture gives CSL a competitive advantage
difficult to imitate. Its global scale was enhanced through the
acquisitions of Swiss company ZLB in 2000 and French
company Aventis Behring in 2004. CSL's acquisitions made it
one of the three biggest industry players, of which account for
roughly 90% of the all-important U.S. market for
immunoglobulin-derived products. This international scale,
which also enables a much lower cost of service, is a deterrent
for many would-be competitors and therefore ensures the
growth of CSL. CSL's operational scale also enables it to offer
medical facilities the reassurance of reliable quality control and
continuity of supply. This reputation for reliability has
established CSL as a powerful global brand in the blood
products space. CSL ensures a competitive advantage through
coordination of its vertically integrated operations. Collection
centres are concentrated in Europe and North America, while
production facilities are spread across the US, Germany,
Switzerland and Australia. Also, due to the astronomical costs
of research and lengthy process involved in registering new
vaccines, it is unlikely any new competitors will be able to
compete with CSL in the near term.
Risks
Blood plasma products are used for critical care patients
suffering from symptoms such as shock, burns or fluid loss. Due
to industry pressure companies may lower the supply to ensure
a rise in prices. Governments may then intervene as it is
imperative these products are readily available. This is a risk to
the company, as the government’s interference in the
operations may not be in the best interest of its shareholders.
At this stage CSL is planning to increase supply to meet
anticipated growth in demand to ensure they maintain the
existing conditions between itself and the government.
CSL maintains control over its core ingredient, blood plasma.
There is a risk that a product is invented that supplements
blood plasma. Advances in scientific technologies could
enable the development of synthetic blood, which will remove
the need for the human source. Although there is a possibility
of this occurring, any significant threat to the industry from
new technology will take at least 10 years to pass regulatory
hurdles. CSL also has the financial capacity to acquire any such
threat. Therefore this is a evidence that CSL will sustain its
current competitive advantage for a significant period of time.
Firm-Based Analysis
Growth Estimates
Plowback Ratio* 54.95%
10
ROE
27.8%
* Calculated using average of FY 10/11
and 11/12 dividend payout ratios
Growth Estimate
Economic and industry based analysis tells us that the
environment for growth is ideal. Using firm-based analysis, we
can prove that growth for CSL will be positive. Using the
plowback ratio and ROE, CSL is estimated to grow by 15.28%
during the year ahead. NPAT should rise to $1,132.74 million
and investors will benefit from this rise when CSL pays out a
higher final dividend. The large rise in the price of the interim
dividend this year compared with last, is a clear indicator that
CSL is continuing to make substantial profits from its
operations.
We can see a positive trend in the EPS, which indicates
growing profitability of CSL. The company has an estimated 5
year EPS growth rate of 20.45% compared with the industry of
9.32%11. Overall the company’s growth is intended to expand,
as profits from demand in its products increases.
Strong cash flow generation means the balance sheet has very
little gearing and a significant cash balance. Its debt to equity
ratio of 32.12 is below the industry average12, which provides
reassurance to it’s investors of its financial stability. Capital is
expected to be directed towards further share buy backs,
investing in R&D and acquisitions.
Estimates for FY12/13
15.28% NPAT growth rate
39% Final dividend growth rate
Average price for FY (as at 15/6/13)
FY10/11
FY11/12
FY12/13
NPAT (m)
$940.60
$982.60
$1,132.74
Average Shares on issue (m)
547.16
518.32
501.16
EPS
$1.72
$1.90
$2.26
Interim Dividend
$0.35
$0.36
$0.50
Final Dividend
$0.45
$0.47
$0.65
Annual Dividend
$0.80
$0.83
$1.15
Average Share Price
$34.30
$32.50
$51.50
Dividend Yield
2.33%
2.55%
2.24%
PE Ratio (times)
19.95
17.14
22.79
References
CSL Limited, 2013. About CSL [ONLINE] Available at: http://www.csl.com.au/about [Accessed 15 June
2013].
DatAnalaysis 2013, CSL.AX [ONLINE] Available at:
http://datanalysis.morningstar.com.au.ezproxy.lib.swin.edu.au/af/company/corpdetails?
ASXCode=CSL&xtm-licensee=datpremium [Accessed 16 June 2013].
FinAnalysis 2013, CSL.AX, [ONLINE] Available at:
http://www.aspectfinancial.com.au.ezproxy.lib.swin.edu.au/af/company/annualsegperformance?
ASXCode=CSL&xtm-licensee=finanalysis [Accessed 21 June 2013].
Gottlibsen, R. 2013. Exit the king: McNamee's mastery | Business Spectator. 2013. Exit the king:
McNamee's mastery | Business Spectator. [ONLINE] Available at: http://www.businessspectator.com.au/
article/2013/6/17/health-and-pharmaceuticals/exit-king-mcnamees-mastery. [Accessed 25 June 2013].
Morningstar Inc. 2013, Stocks (CSL.AX), [ONLINE] Available at: http://www.morningstar.com.au/Stocks/
NewsAndQuotes/CSL [Accessed 16 June 2012].
Officer, B & Bishop, S. 2009, Market Risk Premium [ONLINE] Available at: http://www.aer.gov.au/sites/
default/files/JIA%20Appendix%20J%20-%20Officer%20and%20Bishop%20-%20Market%20risk%
20premium-Further%20comments.pdf. [Accessed 17 June 2013].
Reuters.com. 2013. CSL Ltd (CSL.AX) Quote| Reuters.com. [ONLINE] Available at: http://www.reuters.com/
finance/stocks/overview?symbol=CSL.AX. [Accessed 22 June 2013].
Yahoo! Finance. 2013. CSL.AX: Summary for CSL FPO- Yahoo! Finance. [ONLINE] Available at: http://
finance.yahoo.com/q?s=CSL.AX. [Accessed 15 June 2013].
Appendix 1
Segments
Revenue
CSL Behring
79.09%
Intellectual Property Licensing
2.99%
Other Human Health
17.92%
FinAnalysis 2013, CSL.AX, Annual Segment Performance. Available at:
http://www.aspectfinancial.com.au.ezproxy.lib.swin.edu.au/af/company/annualsegperformance?
ASXCode=CSL&xtm-licensee=finanalysis [Accessed 15 June 2013].
Appendix 2
Company Name
FCFF ($M)
CSL Limited
1,152
Mesoblast Limited
207
Pharmaxis Ltd
81
Starpharma Holdings Limited
43
GI Dynamics, Inc
40
FinAnalysis 2013, CSL.AX, Peer Analysis - Annual Cash Flow - Cash at End. Available at::
http://www.aspectfinancial.com.au.ezproxy.lib.swin.edu.au/af/company/mainview?ASXCode=CSL
[Accessed 15 June 2013].
Appendix 2
Date
2013
2012
2012
2011
2011
Dividend Type
Interim
Final
Interim
Final
Interim
CPU
50
47
36
45
35
Total CPU
2011
80
2012
83
FinAnalysis 2013, CSL.AX, Dividends History. Available at:
http://www.aspectfinancial.com.au.ezproxy.lib.swin.edu.au/af/company/dividendspay?
ASXCode=CSL&xtm-licensee=finanalysis [Accessed 22 June 2013]
Appendix 4
Dividend Date
29-Nov-94
26-Apr-95
29-Nov-95
29-Apr-96
21-Nov-96
28-Apr-97
20-Nov-97
29-Apr-98
15-Oct-98
28-Apr-99
14-Oct-99
26-Apr-00
12-Oct-00
24-Apr-01
11-Oct-01
23-Apr-02
10-Oct-02
15-Apr-03
10-Oct-03
13-Apr-04
8-Oct-04
15-Apr-05
10-Oct-05
10-Oct-05
13-Apr-06
13-Oct-06
13-Apr-07
12-Oct-07
14-Apr-08
10-Oct-08
9-Apr-09
9-Oct-09
9-Apr-10
8-Oct-10
8-Apr-11
14-Oct-11
13-Apr-12
12-Oct-12
5-Apr-13
CPU
5
5
7
5
8
5.5
10
6
12
7
14
8
15
9
17
12
22
12
22
12
26
17
30
10
28
40
49
55
23
23
30
40
35
45
35
45
36
47
50
FinAnalysis 2013, CLS.AX, Dividends History. Available at:
http://www.aspectfinancial.com.au.ezproxy.lib.swin.edu.au/af/company/dividendspay?
ASXCode=CSL&xtm-licensee=finanalysis [Accessed on 21 June 2013]
Appendix 5
Morningstar 2013, CSL.AX, Latest Research Report, Available at:
http://www.morningstar.com.au/Stocks/Research/20130515/CSL [Accessed on 15 June 2013]
Appendix 6
Beta FinAnalysis 2013, Main View Business Summary - CSL. Available at::
http://www.aspectfinancial.com.au.ezproxy.lib.swin.edu.au/af/
company/mainview?ASXCode=CSL [Accessed on 20 June 2013]
Rf Bloomberg 2013, Market Data - Australian Government Bonds, Available at: http://www.bloomberg.com/markets/rates-bonds/government
-bonds/australia/ [Accessed on 20 June 2013]
Rm Officer, B & Bishop, January 2009, Market Risk Premium, Published
Value Advisers Associates, Available at: http://www.aer.gov.au/sites/
default/files/JIA%20Appendix%20J%20-%20Officer%20and%
20Bishop%20-%20Market%20risk%20premium-Further%
20comments.pdf [Accessed on 20 June 2013]
Appendix 7
“We expect the ageing of the population in most developed markets, and growing expenditure on
healthcare in emerging markets, to continue to drive industry growth at mid to high single digit rates.
CSL’s revenue and earnings should grow at least in line with industry rates given its strong market
position.”
Morningstar 2013, CSL.AX, Latest Research Report, Available at:
http://www.morningstar.com.au/Stocks/Research/20130515/CSL [Accessed on 15 June 2013]
Appendix 8
Item
Receipts from Customers
Payments to Suppliers and Employees
Dividends Received
06/11
06/12
4,302,820,000
4,653,600,000
-3,012,454,000 -3,250,100,000
0
0
30,399,000
35,700,000
-13,995,000
-34,500,000
-288,651,000
-244,700,000
0
0
1,018,119,000
1,160,000,000
-212,210,000
320,000
0
2,248,000
0
0
0
-310,900,000
100,000
0
1,000,000
0
0
0
Loans Repaid
0
0
Other Investing Cashflows
0
0
-209,642,000
-309,800,000
16,626,000
9,800,000
Interest Received
Interest Paid
Tax Paid
Other Operating Cashflows
Net Operating Cashflows
Payment for Purchase of PPE
Proceeds From Sale of PPE
Investments Purchased
Proceeds From Sale of Investments
Payments for Purchase of Subsidiaries
Proceeds from Sale of Subsidiaries
Loans Granted
Net Investing Cashflows
Proceeds from Issues
Proceeds from Borrowings
Repayment of Borrowings
Dividends Paid
Other Financing Cashflows
Net Financing Cashflows
Net Increase in Cash
Cash at Beginning of Period
Exchange Rate Adj
Other Cash Adjustments
Cash at End of Period
49,256,000 1,057,300,000
-18,292,000
-232,200,000
-435,882,000
-422,100,000
-900,302,000
-625,200,000
-1,288,594,000
-212,400,000
-480,117,000
637,800,000
994,505,000
478,800,000
-35,569,000
35,300,000
0
0
478,819,000 1,151,900,000
DatAnalysis 2013, CSL.AX, Company Reports - Financial Data (Cash Flow), Available at:
http://datanalysis.morningstar.com.au.ezproxy.lib.swin.edu.au/ftl/company/cashflow?xtmlicensee=datpremium&ASXCode [Accessed 15 June 2013]
Appendix 9
Country
Revenue
Australia
13.04%
Germany
14.69%
Rest of world
30.62%
Switzerland
3.18%
USA
38.46%
FinAnalysis 2013, CSL.AX, Annual Segment Performance, Available at:
http://www.aspectfinancial.com.au.ezproxy.lib.swin.edu.au/af/company/annualsegperformance?
ASXCode=CSL&xtm-licensee=finanalysis [Accessed 15 June 2013]
Appendix 10
Morningstar 2013, CSL.AX, Latest Research Report, Available at:
http://www.morningstar.com.au/Stocks/Research/20130515/CSL [Accessed on 21 June 2013]
Appendix 11
Reuters.com. 2013.CSL Ltd (CSL.AX) Financials | Reuters.com. [ONLINE] Available at: http://
www.reuters.com/finance/stocks/financialHighlights?symbol=CSL.AX. [Accessed 22 June 2013].
Appendix 12
Reuters.com. 2013.CSL Ltd (CSL.AX) Financials | Reuters.com. [ONLINE] Available at: http://
www.reuters.com/finance/stocks/financialHighlights?symbol=CSL.AX. [Accessed 22 June 2013].