Since CSL's record $52 high in January last year, the company's share price has fallen quickly, with lows just below $12 at the end of the financial year.
Price movement Since CSL's record $52 high in January last year, the company's share price has fallen quickly, with lows just below $12 at the end of the financial year. The share price commenced a recovery in October, only to be sold down lower again, after a profit downgrade and industry rationalisation fears.
Profile Commonwealth Serum Laboratories was established in 1916 and commenced plasma fractionation in 1952. It was floated by the Federal Government in June 1994 as CSL. It is the largest company in the Australian biotechnology/pharmaceutical sector. Its main business and revenue earners are blood fractionating and vaccine development.
CSL's four main divisions are animal health, bioplasma, biosciences and pharmaceutical. It continues to be Australia's largest investor in pharmaceutical research and development. This R&D expenditure is developing new products for the global markets.
Current details CSL is the third-largest blood plasma fractionating company in the world. CSL has announced it is in preliminary discussions to acquire rival Aventis Behring. This would make it the biggest plasma company in the world.
This potential transaction and how it is to be funded (through debt or shares) is worrying the market and depressing its share price. Further, CSL management announced in May that negative currency moves could take $48 million from earnings, with the Australian dollar appreciating against both the US dollar and the Swiss franc.
Forecasts for the financial year just ended are for a profit of $127 million, down from $186 million. This places CSL on a P/E of 18.5 times and dividend yield of 2.5 per cent.
CSL will have to rely on its other businesses and new products to deliver growth in the short term, but these are not as significant as its major investments in blood plasma fractionation.
Sector The US plasma market has excess capacity and there has been industry consolidation. The second-largest plasma company, Baxter, has announced it will close more than a sixth of its fractionation centres. The oversupply will stunt revenue growth, with price discounting.
Rationalisation will ultimately be good for CSL. However, it will take time for blood plasma stocks to reduce. A quick turnaround in this sector's profitability cannot realistically be expected.
Worth buying? CSL's share price reflects expectations of growth this financial year. These may well be a year off, as the company's major profit driver (blood plasma fractionating) may be at the beginning of major industry rationalisation. CSL appears to be a stock to avoid until tangible positive change has occurred in the US industry.
Geoffrey Hill is presenter of ABC NewsRadio's daily afternoon finance report and is an independent private client adviser. Visit www.ghill.com.au
