CSLLY - CSL Limited: Fiscal 2024 Outlook In The Spotlight

2023-06-21 05:51:01 ET

Summary

• CSL Limited's FY 2024 profit guidance outlined in a recent announcement last week came in below expectations, and this led to a meaningful correction in its share price.
• The company's earnings guidance for the new fiscal year was negatively affected by unfavorable foreign exchange assumptions, while its other metrics relating to demand and expenses are pretty healthy.
• I view the recent correction in CSL Limited's shares as a buying opportunity, as I think that its actual FY 2024 performance should be better than what its guidance suggests.

Elevator Pitch

My investment rating for CSL Limited ( OTCQX:CSLLY ) [CSL:AU] shares remains as a Buy. With my earlier update for CSL Limited written on February 15, 2023, I discussed about the company's choice of a new CEO, the launch of a new product in the US, and its 1H FY 2023 results (YE June 30).

In this latest article, I find that the market has unfairly penalized CSL Limited's shares for its lower than expected FY 2024 net profit guidance. In my opinion, this throws up an investment opportunity for CSL Limited stock, as the company's current valuations are below historical averages. As such, I retain a Buy rating for CSL Limited.

Investors should note that CSL Limited has shares traded in Australia and on the OTC market. The three-month average daily trading values for CSL Limited's OTC shares and shares listed on the Australian Securities Exchange were approximately $3 million and $130 million, respectively as per S&P Capital IQ data. Readers have the choice of relying on US brokers which provide international equity markets access like Interactive Brokers to trade in CSL Limited's relatively more liquid Australia-listed shares.

Share Price Correction Driven By Below- Expectations Headline FY 2024 Guidance

CSL Limited's stock price fell by -6.8% from $104.64 as of June 13, 2023 to close at $97.50 at the end of the June 14, 2023 trading day. CSLLY's last done share price as of June 20, 2023 was $96.05, and this implies that the company's shares have pulled back by -8.2% in the past week.

The company's share price weakness for the last one week is likely linked to its announcement on June 14, 2023 which outlined expectations for its full-year fiscal 2024 (July 1, 2023 to June 30, 2024) outlook. Specifically, CSL Limited expects to report a Net Profit after Tax and Amortization or NPATA of $2.9-$3.0 billion which is equivalent to a growth rate of +13%-18%.

CSL Limited's recently disclosed FY 2024 earnings guidance (based on mid-point of guidance at $2.95 billion) fell short of the market's prior consensus bottom line projection by around -15% based on data taken from S&P Capital IQ. This helps to explains why CSL Limited's shares performed badly on June 14, 2023.

FY 2024 Outlook Wasn't Bad Than What It Seemed To Be

The company organized a call (event transcript sourced from S&P Capital IQ ) with sell-side analysts and buy-side investors on June 14 last week to provide more color on its forward-looking guidance. A review of CSL Limited's management commentary at the June 14 investor event suggests that the company's prospects for fiscal 2024 are probably better than what headline guidance numbers imply.

At the June 14 call, CSL Limited didn't disagree with one of the attendees' view that the company's "FY '24 number has been deteriorated by the FX (foreign exchange)" to some degree.

In the company's June 14 announcement, CSL Limited specifically highlighted that the $2.9-$3.0 billion FY 2024 net profit guidance was determined on a "constant currency" basis. The company explained at its June 14 call that its constant-currency FY 2024 earnings guidance is assumes that foreign exchange "rates remain steady" which is contrast with the sell-side's consensus forecasts that incorporate "house views on currency expectations." Notably, CSL Limited emphasized that "the greater the currency headwinds in FY '23, the lower the starting point when we are determining our FY '24 (earnings) growth rate."

In other words, foreign currency movements have been unfavorable for CSL Limited leading up to the end of fiscal 2023, which have a negative impact on the company's FY 2024 net income guidance which assumes unchanged exchange rates.

If one takes foreign exchange effects out of the equation, CSL Limited's outlook relating to demand and costs appears to be pretty favorable.

The company revealed at the June 14, 2023 call that "diagnosis rates" relating to Ig or Immunoglobulins in the US have gone up from approximately 70% of pre-pandemic levels previously to in excess of 80% now, which bodes well for demand. Separately, CSL Limited guided at the mid-June investor event that it expects the cost per liter of plasma (a key expense item for the company) to decrease by between -15% and -20% from the peak by year-end.

In a nutshell, unfavorable foreign exchange rate fluctuations were a key reason for CSL Limited's weaker than expected FY 2024 earnings growth guidance. Other metrics relating to demand and costs suggest that the company's FY 2024 performance could turn out to be much better than what headline guidance implies.

CSL Limited's Shares Have Come Down To More Attractive Levels

After its share price decline in the past week, CSL Limited currently trades at 22.8 times consensus forward next twelve months' EV/EBITDA and 33.5 times consensus forward next twelve months' normalized P/E as per S&P Capital IQ's valuation data.

CSL Limited is now valued by the market at valuation multiples below their respective historical averages. The five-year mean consensus forward EV/EBITDA and normalized P/E valuation multiples for CSL Limited were higher at 25.1 times and 37.2 times, respectively. It will be reasonable to refer to CSL Limited's current valuations as appealing based on a historical comparison.

Concluding Thoughts

I am of the view that CSL Limited's stock is a Buy on the dip, as the company's FY 2024 prospects aren't as poor as what the guidance implies. Considering that CSL Limited's key valuation multiples are now below their five-year historical averages, I continue to see CSL Limited's shares as undervalued and worthy of a Buy rating.

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