CSLLY - CSL Limited Remains A Buy As Earnings Beat Expectations

Summary

• CSL Limited's 1H FY 2023 net profit came in +10% above analysts' expectations, as a result of both solid revenue growth and significant margin improvement.
• I also have a positive opinion about the planned introduction of the new hemophilia B gene therapy product in the US, and the company's new CEO appointment.
• I leave my Buy rating for CSL Limited stock unchanged, in view of its 1H FY 2023 earnings beat and other favorable developments.

Elevator Pitch

I continue to assign a Buy rating to CSL Limited's ( OTCPK:CSLLY ) [CSL:AU] stock.

I wrote about CSL Limited's acquisition of Vifor and the company's R&D pipeline in my November 15, 2022 article . This current update is focused on the review of CSL Limited's recent interim financial performance and other key corporate developments.

CSL Limited's 1H FY 2023 (YE June 30) results exceeded the sell-side's expectations; my confidence in the company's R&D pipeline is boosted by the targeted launch of HEMEGNIX in 2H FY 2023. In consideration of the above-mentioned factors, my Buy rating for CSL Limited stays unchanged.

CSL Achieved A Significant Earnings Beat For 1H FY 2023

CSL Limited announced the company's 1H FY 2023 financial results on February 14, 2023.

CSL Limited's net income attributable to shareholders grew by +229% HoH (Half-on-Half) from $494 million in the second half of fiscal 2022 to $1,623 million for the first half of fiscal 2023. The company's actual 1H 2023 bottom line was +10% higher than the sell-side analysts' consensus net profit estimate of $1,476 million as per S&P Capital IQ data.

The 1H FY 2023 earnings beat for CSL Limited was driven by robust top line growth and meaningful profitability improvement.

Headline revenue for CSL Limited increased by +59% HoH and +19% YoY to $7,184 million in 1H FY 2023. CSL Limited's top line would have expanded by +25% YoY, if adjusted for foreign exchange effects.

The company's Behring (plasma technologies) and Seqirus (vaccines) business segments saw their respective constant-currency revenue grow by +11% and +9%, respectively in YoY terms for the first half of the current fiscal year. In my previous August 22, 2022 write-up , I noted that the performance of the Behring business segment should improve "with plasma collection activity normalizing as COVID-19 eases", and this is exactly what happened. Separately, an increase in demand for influenza vaccines was the key reason for the Seqirus business' good top line expansion in the recent interim period.

CSL Limited's 1H FY 2023 top line also benefited from revenue contributed by the recently acquired Vifor.

With respect to operating profitability, CSL Limited's EBITDA margin expanded by +10.3 percentage points from 24.7% for 2H FY 2022 to 35.0% in 1H FY 2023. The actual EBITDA margin achieved by CSL Limited for 1H FY 2023 turned out to be +290 basis points better than the market's consensus EBITDA margin projection of 32.1% based on data taken from S&P Capital IQ .

Specifically, it is worthy of note that the gross profit margin for CSL Limited's Seqirus business segment widened by +390 basis points YoY from 65.0% in 1H FY 2022 to 68.9% for 1H FY 2023. CSL Limited explained at the company's 1H FY 2023 earnings briefing that "the continued success in the product differentiation strategy and improved manufacturing efficiencies" were the main reasons for the gross margin expansion for the Seqirus business.

FDA Approval For HEMGENIX Speaks Volumes About R&D Pipeline Strength

With my prior mid-November 2022 update for the company, I stressed that CSL Limited has established "a strong R&D pipeline without overspending" with expectations that "a fifth of its R&D pipeline could potentially be successful."

In the company's 1H FY 2023 earnings presentation slides , CSL Limited highlighted that HEMEGNIX, which it referred to as "the first gene therapy for hemophilia B" has secured approval from the U.S. Food and Drug Administration or FDA. CSL Limited guided at its most recent interim results call that HEMEGNIX is targeted to be introduced in the US market by the second half of fiscal 2023 (first half of calendar year 2023). This serves as a validation of the strength of CSL Limited's R&D pipeline.

The mid-point of CSL Limited's fiscal 2023 financial guidance points to the company's revenue growing by an impressive +29% in constant-currency terms for the full year. Revenue contribution from HEMEGNIX is expected to be among the key top line drivers for CSL Limited in 2H FY 2023.

Positive On New CEO Appointment

A key development for CSL Limited is the appointment of a new CEO.

Starting on March 6 this year, the current Chief Operating Officer or COO of CSL Limited, Dr. Paul McKenzie, will take over the role of CEO from Mr. Paul Perreault who has decided to retire.

In my opinion, there are two key positives associated with this new CEO appointment.

Firstly, CSL Limited has made the choice of promoting the company's existing COO, rather than going with a hired hand who might not be familiar with CSL Limited's current business operations.

Secondly, Dr. McKenzie has relevant experience in areas such as "technical development, global manufacturing, supply chain operations, quality, and engineering" with a background in "chemical engineering" as highlighted in his profile posted on the company's website. This is much better than choosing a financially-savvy CEO with limited industry knowledge who might focus more on expense optimization rather than building new top line growth drivers for the future.

Closing Thoughts

CSL Limited delivered a positive surprise with its recent interim financial results. I am also pleased with how CSL Limited has chosen its new CEO and managed its R&D pipeline. As such, I still award a Buy rating to CSL Limited.

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