CSL is well owned across Australian investor portfolios, including Banyantree Australian Core Equity strategy. The recent share price decline has caused us as much angst as anyway else. CSL’s recent share price decline and overall trend over the past 1 year (price down from ~$310 to $220) has raised a few questions. In our report (attached for convenience) we provide a few different ways to look at CSL’s valuation (you pick your path) and what we are doing with our position in the company.
Fundamental valuation suggests price correction overdone.
CSL is a high quality company with a long history of profits, critical (not so easy to replicate) products and a highly cash generative business model. So in many ways it is a little easier to value the company by forecasting future cash flows with some degree of confidence. We have provided our discounted cash flow analysis below. This takes into account the recent earnings update, management forecasts, our forecasts and near-to-medium term challenges the company is facing. Long story story – we can have a cash based, fundamental value of $291. Materially above current share price.
I guess we can see why a lot of the sell side analysts still have it on a Buy and frankly it’s an easy sell because CSL is a household name and current share price appears to be a great buying opportunity. Perhaps.
Market based valuation suggests potentially more downside and therefore sit tight.
And this is the reason why we have moved to Neutral. For complete transparency we have also provided our PE-relative valuation, which utilises current market multiples on similar or direct peers of CSL. This is the multiple the market is willing to put on this stock today – whether we agree with it or not we need to factor that in our valuation, in our view. CSL may well start rallying again based on the fundamental value we provided above, but we suspect the market is going to question what multiple should be applied to CSL given now it has a lot more challenges and margin recovery is slower than expected in one of its core businesses Behring (see report).
Why do we still apply a premium to CSL’s multiple vs peer group (see below)? That is because we still hold the view that CSL is better operated than some of its direct peers (e.g. the systems and operations of its plasma collection centres are superior in our view). But this premium may now erode because some of the challenges the company is facing is impacting margins getting back to those attractive levels pre Covid (why we liked the company and placed a higher multiple on it). You can see how the valuation below potentially suggests there may be downside.
We understand not every pharma is the same but again the point we are making with the table below is that CSL trades at a material premium to global peers (many we cover) who trade on lower multiples. Part of why CSL’s multiple is also bloated is because the concentration in the Australian market and CSL’s index weight (passive money).
PM view.
We continue to own CSL in our Australian Core Equity Strategy but it is only 2.8% of our portfolio vs S&P/ASX 200 ~4%. The way we size our positions (which is the way we have always approached it) is working for our strategy in this case. We have no plans to remove CSL or increase our weight. Interestingly, many fund managers recently reweighted out of CBA and into BHP & CSL because of concerns around CBA’s valuation.
Well CBA actually ended up delivering an uneventful, solid result (boring is good!). Below are the top ten positions of two fund managers we actively use in our multi-asset strategies and have a lot of respect for – Pendal Focus Australian Fund and Ausbil Australian Active Fund (both of which we consider core strategies). This is why we are benchmark unaware – very rarely will investors see positions of 8-10% in one stock in our strategies (nothing wrong with the approach) because even the best companies can stumble!
Over the short term we may underperform (example CBA goes on a massive rally – we are 6.5% in CBA vs BM 11%), but over the long term we will deliver a solid return for our investors. See below – since our inception we are outperforming the market and these funds but more importantly we are delivering our 8-12% target without taking on excessive risk. We would encourage clients to consider Banyantree’s Australian Core Equity strategy for their respective clients.
