Can CSL’s success story continue?

Financial journalist
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Clearly, the Australian government didn’t have a clue what it owned when – in one of the first privatisations in this country – it sold the former Commonwealth Serum Laboratories through a sharemarket float in June 1994.

The government flogged the serum and antivenin maker – now known as CSL Limited (CSL) – off at $2.30 a share; a three-for-one share split in 2007 means that was effectively 77 cents a share. This week, CSL surged through $50 for the first time.

A success story

Australia’s home-grown biotech star is unrecognisable from the company that was floated 18 years ago. Under the outstanding leadership of Brian McNamee (who will stand down in July 2013), CSL has become the world’s second-largest blood products company and a world-class biotech business. CSL now has revenue of about $4.4 billion and more than 10,500 employees across 27 countries. It has significant manufacturing operations in Australia, the United States, Germany and Switzerland.

CSL collects blood plasma through the Red Cross and its own collection centres and uses it to make a wide range of medicines, the most important of which is intravenous immunoglobulin (IVIG, which is the chemical portion of blood that contains antibodies). This is used to treat immune deficiencies and inflammatory diseases. CSL’s main IVIG products are high-margin products such as Privigen and Hizentra.

There are exciting indications that IVIG could be used to treat life-threatening conditions including multiple sclerosis and haemophilia. Another potentially large opportunity for CSL is the possibility that IVIG can be used to treat Alzheimer’s disease.

CSL’s main vaccine products are the flu vaccine and a human papillomavirus (HPV) cervical cancer vaccine, Gardasil, which is licensed to Merck (as Gardasil) and GlaxoSmithKline (as Cervarix). CSL was one of the companies that the world health authorities turned to in 2009 when a vaccine was needed for the H1N1 strain of swine flu.

Growth potential

At $50, CSL has delivered float subscribers a capital gain of 6,390%. But original CSL shareholders have also received $8.275 in dividends: that makes the total return 7,468%. The dividend flow has paid for the original shares more than ten times over.

Ordinarily, a stock boasting a dividend yield of less than 2%, franked to a single-digit percentage, would not be a suitable candidate for a self-managed super fund ( SMSF) portfolio. But CSL is something different: it is one of Australia’s few global industrial players and a ‘growth’ stock in the true sense of the word.

For example, in its life on the stock market under the lead of CEO Brian McNamee, CSL has delivered total shareholder returns of more than 25% a year – and most of that has come from the share price.

CSL has also rewarded shareholders with $5.4 billion worth of share buybacks since October 2011.

In fact, given the defensive nature of the healthcare business, CSL is that rarest of combinations – defensive global growth – in the one stock.

Profit upgrade

This status was reiterated this week when CSL came out with a profit upgrade. After reporting net profit after tax of just over US$1 billion last financial year, CSL had forecast a 12% rise in profit in 2012-13, but it told the market on Tuesday that its profit lift would be more like 20% once exchange rate effects are taken out. (Starting in the 2012-13 financial year, CSL will report in US dollars to better match its global peer group). The shares jumped almost 8% on the back of the upgrade.

The improved outlook for CSL is a salutary lesson on why it is sometimes wise to ignore the professionals. Prior to this week’s upgrade, at least one broker, Citi, downgraded CSL from neutral to ‘sell,’ on the basis of the high price to earnings (P/E) ratio (22 times expected FY2013 earnings) and low dividend yield (2% on expected FY2013 dividend) – but against that, CSL has staked out the basis for why it should still be considered a growth stock.

CSL has a very strong balance sheet – it has no net debt – and while SMSF proprietors should base their portfolios on strong dividend flows, CSL is one of the very rare cases where the dividend flow is secondary. In fact, the reason for the poor level of franking – due to the fact that almost 90% of earnings come from outside Australia – is the big plus for this company.

The bottom line

CSL has built a hugely strong position in the area of medicines derived from blood plasma, and economies of scale magnify the benefits of its low-cost production. Gardasil is going better than expected, and the uplift in royalty income was a major factor in the earnings upgrade.

In a weak economic environment, the defensive qualities of ‘big pharma’ come to the fore, and that is certainly the case for CSL. When added to the high promise of its intellectual property portfolio in applications like Alzheimer’s, you have a case for growth that more than justifies a role as a core holding for an SMSF portfolio.

And if you’ve got it – don’t sell it.

  • Today’s opening price: $50.05
  • Consensus target price: $51.71, with a bias to the upside

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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