CSL LimitedASX Ticker: CSL

CSL Limited
ASX Ticker: CSL
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.
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.
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.
CSL is well positioned with the AUD expected to continue to fall. With almost 90% of its revenue generated from offshore markets, it will benefit from the sustained weaker exchange rate. The aging baby-boomers population will prove favourable for CSL as the demand for healthcare products grows.
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.
Share Price Movement
Market Data 52-week high $64.70 52-week low $37.69
Previous Close $57.97
Market Cap (m) $28,509
Outstanding Shares (m) 491.8 .. 14 June 2013
BUY









010203040506070Jun-08Jun-09Jun-10Jun-11Jun-12Jun-13CSL
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.
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.
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.
79.09%
2.99%
17.92%
Sectors Revenue Generated
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.
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.
Company Analysis
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

  1. 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.
    $0 $500 $1,000 $1,500
    CSL Limited
    Mesoblast
    Limited
    Pharmaxis Ltd
    Starpharma
    Holdings Limited
    GI Dynamics, Inc
    Free Cash Flow to Equity ($ millions)
    CSL Limited
    Mesoblast Limited
    Pharmaxis Ltd
    Starpharma Holdings Limited
    GI Dynamics, Inc
    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.
    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.
    CSL has no existing dividend payout policy, but previous year’s
    show us that they pay out approximately 45% of their NPAT in
    dividends5.
    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.
    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.
    0
    10
    20
    30
    40
    50
    60
    Historical Dividends
    Cents 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.
    Growth Potential
    Economic Analysis
    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.
    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.
    13.04%
    14.69%
    30.62%
    3.18%
    38.46%
    Countries Revenue Generated
    as at 30/06/12
    Australia
    Germany
    Rest of world
    Switzerland
    USA
    VAL UTATION S UMMAR Y 2011 2012 Terminal Value
    F CF E $478,819,000 $1,151,900,000 $39,944,919,355
    PV of F CF E $432,928,571 $941,682,553 $32,655,120,806
    Value of Company $34,029,731,931
    S hares Outs tanding 493,731,343
    P rice P er S hare $68.92
    Constant Growth Rate7 7.5%
    Discount Rate 10.6%
    Terminal Value Assumptions
    Industry Analysis
    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.
    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
    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 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 $51.50
    Dividend Yield 2.33% 2.55% 2.24%
    PE Ratio (times) 19.95 17.14 22.79
    Plowback Ratio* 54.95%
    ROE10 27.8%
    Growth Estimates
  • Calculated using average of FY 10/11
    and 11/12 dividend payout ratios
    References
    CSL Limited, 2013. About CSL [ONLINE] Available at: http://www.csl.com.au/about [Accessed 15 June 2013].
    DatAnalaysis 2013, CSL.AX [ONLINE] Available at:
    http://datanalysis.morningstar.com.au.ezproxy.lib.swin.edu.au/af/company/corpdetails?ASXCode=CSL&xtm-licensee=datpremium [Accessed 16 June 2013].
    FinAnalysis 2013, CSL.AX, [ONLINE] Available at:
    http://www.aspectfinancial.com.au.ezproxy.lib.swin.edu.au/af/company/annualsegperformance?ASXCode=CSL&xtm-licensee=finanalysis [Accessed 21 June 2013].
    Gottlibsen, R. 2013. Exit the king: McNamee’s mastery | Business Spectator. 2013. Exit the king: McNamee’s mastery | Business Spectator. [ONLINE] Available at: http://www.businessspectator.com.au/article/2013/6/17/health-and-pharmaceuticals/exit-king-mcnamees-mastery. [Accessed 25 June 2013].
    Morningstar Inc. 2013, Stocks (CSL.AX), [ONLINE] Available at: http://www.morningstar.com.au/Stocks/NewsAndQuotes/CSL [Accessed 16 June 2012].
    Officer, B & Bishop, S. 2009, Market Risk Premium [ONLINE] Available at: http://www.aer.gov.au/sites/default/files/JIA%20Appendix%20J%20-%20Officer%20and%20Bishop%20-%20Market%20risk%20premium-Further%20comments.pdf. [Accessed 17 June 2013].
    Reuters.com. 2013. CSL Ltd (CSL.AX) Quote| Reuters.com. [ONLINE] Available at: http://www.reuters.com/finance/stocks/overview?symbol=CSL.AX. [Accessed 22 June 2013].
    Yahoo! Finance. 2013. CSL.AX: Summary for CSL FPO- Yahoo! Finance. [ONLINE] Available at: http://finance.yahoo.com/q?s=CSL.AX. [Accessed 15 June 2013].
    Company Name FCFF ($M)
    CSL Limited 1,152
    Mesoblast Limited 207
    Pharmaxis Ltd 81
    Starpharma Holdings Limited 43
    GI Dynamics, Inc 40
    Appendix 1
    Appendix 2
    Segments Revenue
    CSL Behring 79.09%
    Intellectual Property Licensing 2.99%
    Other Human Health 17.92%
    Date Dividend Type CPU
    2013 Interim 50
    2012 Final 47
    2012 Interim 36
    2011 Final 45
    2011 Interim 35
    2011 2012
    Total CPU 80 83
    Appendix 2
    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].
    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].
    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]
    Dividend Date CPU
    29-Nov-94 5
    26-Apr-95 5
    29-Nov-95 7
    29-Apr-96 5
    21-Nov-96 8
    28-Apr-97 5.5
    20-Nov-97 10
    29-Apr-98 6
    15-Oct-98 12
    28-Apr-99 7
    14-Oct-99 14
    26-Apr-00 8
    12-Oct-00 15
    24-Apr-01 9
    11-Oct-01 17
    23-Apr-02 12
    10-Oct-02 22
    15-Apr-03 12
    10-Oct-03 22
    13-Apr-04 12
    8-Oct-04 26
    15-Apr-05 17
    10-Oct-05 30
    10-Oct-05 10
    13-Apr-06 28
    13-Oct-06 40
    13-Apr-07 49
    12-Oct-07 55
    14-Apr-08 23
    10-Oct-08 23
    9-Apr-09 30
    9-Oct-09 40
    9-Apr-10 35
    8-Oct-10 45
    8-Apr-11 35
    14-Oct-11 45
    13-Apr-12 36
    12-Oct-12 47
    5-Apr-13 50
    Appendix 4
    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
    Appendix 6
    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]
    Bloomberg 2013, Market Data – Australian Government Bonds, Avail-able at: http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/ [Accessed on 20 June 2013]
    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]
    Beta
    Rf
    Rm
    Morningstar 2013, CSL.AX, Latest Research Report, Available at:
    http://www.morningstar.com.au/Stocks/Research/20130515/CSL [Accessed on 15 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 06/11 06/12
    Receipts from Customers 4,302,820,000 4,653,600,000
    Payments to Suppliers and Employees -3,012,454,000 -3,250,100,000
    Dividends Received 0 0
    Interest Received 30,399,000 35,700,000
    Interest Paid -13,995,000 -34,500,000
    Tax Paid -288,651,000 -244,700,000
    Other Operating Cashflows 0 0
    Net Operating Cashflows 1,018,119,000 1,160,000,000
    Payment for Purchase of PPE -212,210,000 -310,900,000
    Proceeds From Sale of PPE 320,000 100,000
    Investments Purchased 0 0
    Proceeds From Sale of Investments 2,248,000 1,000,000
    Payments for Purchase of Subsidiaries 0 0
    Proceeds from Sale of Subsidiaries 0 0
    Loans Granted 0 0
    Loans Repaid 0 0
    Other Investing Cashflows 0 0
    Net Investing Cashflows -209,642,000 -309,800,000
    Proceeds from Issues 16,626,000 9,800,000
    Proceeds from Borrowings 49,256,000 1,057,300,000
    Repayment of Borrowings -18,292,000 -232,200,000
    Dividends Paid -435,882,000 -422,100,000
    Other Financing Cashflows -900,302,000 -625,200,000
    Net Financing Cashflows -1,288,594,000 -212,400,000
    Net Increase in Cash -480,117,000 637,800,000
    Cash at Beginning of Period 994,505,000 478,800,000
    Exchange Rate Adj -35,569,000 35,300,000
    Other Cash Adjustments 0 0
    Cash at End of Period 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]
    Country Revenue
    Australia 13.04%
    Germany 14.69%
    Rest of world 30.62%
    Switzerland 3.18%
    USA 38.46%
    Appendix 9
    Appendix 10
    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]
    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
    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].
    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].

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