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Is the CSL Limited (ASX:CSL) share price 18% undervalued?

The CSL Limited (ASX: CSL) share price is up 15% in one year. Meanwhile, the S&P/ASX 200 Healthcare sector has traded sideways for the last 3 years, after the pandemic forced people to delay elective surgeries and companies to delay clinical trials, the result of which has dampened investor sentiment in the sector.

ASX healthcare shares back in focus?

Now that the world has reopened, with tailwinds from an ageing population and continual advancements in medical technology, we think the healthcare sector looks well placed to resume the pre-Covid growth trajectory.

CSL is Australia’s leading healthcare company and has been a great Australian success story since going public, with investors in the 1994 IPO enjoying 25.13% per year compounding returns — versus the ASX All Ordinaries (ASX: XAO) over the same period 9.17% per year.

CSL’s is a global leader in what it does, its flagship Behring (rare & serious disorders) and Seqirus (influenza vaccines) segments consistently outperform competitors.

CSL plasma collections booming again

Due to the pandemic, CSL’s plasma collections were down in the US, as donors were reluctant or unable to visit clinics and donate blood. CSL uses the blood plasma itthey collects for treatments, so a lack of supply caused sales and earnings (EPS) growth to stall.

Fast forward to today, CSL’s collections rates have rebounded, up 36% for the first half. Plasma cost per litre appears to have peaked and immunoglobulin (IG) sales demand is strong. This all resulted in an interim profit of US$1.82 billion, up 10% on a constant currency basis and an interim dividend of US$1.07 per share, up 9% on the prior period.

Despite encouraging signs, margin improvements may take some time. If CSL reduces the price paid to plasma donors too quickly, supply may be impacted because people won’t donate, just as the collection centres are ramping back up.

Vifor acquisition

CSL purchased Vifor, the Swiss renal therapy and iron deficiency products business in August 2022. Both of Vifor’s key markets are seen as growth areas of the pharmaceutical industry.

Vifor contributed five months towards CSL results and revenue grew 15% at the half year as demand normalised and inventory unwound. CSL expects synergies from negotiating more favourable deals with partners to increase Vifor’s margins and leveraging CSL’s lower cost of funding to expand Vifor’s R&D pipeline, which includes potentially high value drugs for secondary heart attacks and diabetic kidney disease.

CSL share price valuation discount

We think the market has not caught on to the fact that CSL’s outlook is stronger than ever. CSL shares trade near three-year lows on a forward Pprice-earnings (P/E) basis of 31x earnings and below its average premium to the rest of the ASX.

CSL’s guidance for FY23 was recently reaffirmed. CSL confirmed net profit after tax (NPAT) of $2.7 billion to $2.8 billion on a constant currency basis, which triggered broker upgrades across the market. The result? The consensus price target amongst analysts for CSL shares increased to $353, which represents ~18% upside from today’s price.

That seems nice…

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Seneca General Advice Disclaimer

This investment report was written by Luke Laretive, founder of Seneca Financial Solutions. Seneca holds an Australian Financial Service License (AFSL No. 492686) and is regulated by the Australian Securities and Investments Committee (ASIC). The information contained in this email is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. Luke Laretive, Seneca Financial Solutions, its Directors and its associated entities may have or had interests in the companies mentioned. Although every effort has been made to verify the accuracy of the information contained in this article, all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this email or any loss or damage suffered by any person directly or indirectly through relying on this information. Read Seneca’s Terms, Financial Services Guide, Privacy Policy.

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