Talking Top Twenty | Part 4: CSL & Wesfarmers

Sid Ruttala continues his journey through the ASX20. This week his notes visit and review CSL Ltd. (CSL.ASX) and Wesfarmers Ltd (WES.ASX). 

Author: Sid Ruttala

If you have missed some of the earlier parts to Sid Ruttala's latest Talking Top Twenty, you can find them here:

Part 1: The Banks - CBA & WBC
Part 2: The Banks - NAB & ANZ
​​Part 3: BHP & Fortescue

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​CSL Ltd (CSL.ASX)

Mixed results from CSL though beats on management guidance, which has historically been on the conservative side. In our previous notes, we had mentioned the likely headwinds to plasma collection as a result of Covid and the associated lockdowns. While the company did continue to expand its collection footprint across the US, it was disappointing to see a sharp decline, coming in at about 80% of 2019 volumes. Numbers wise, stellar growth across profit and revenue with revenue up 15% and NPAT up 44%. 

Looking at the results in slightly more depth, this was driven primarily by Seqris and the increased demand for seasonal influenza vaccines (+44%). Importantly, gross margins continue to increase substantially, a clear sign of management discipline. There are signs of renewed life across the Albumin product line with hospitals back to 90% capacity in China and associated increases to elective surgery. Across the hemophilia market, the numbers were a little mixed, with sales flat or in some cases declining due to competitive pressures (this was expected). Ironically, the stimulus packages in the US may have been a headwind for the company (i.e. disincentivising plasma collection primarily in lower socioeconomic households). Nevertheless, management seems to have a clear vision to grow the supply network and add on collection centres (44 to be exact). 

Going forward, however, management only reaffirmed earnings guidance of 6-10%, which implies that 12-20% of FY21 earnings will be generated in the second half. This is substantially lower than the 5-year average of 40%. A substantial decline in growth.

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Red Flags & Risks: While a decline in collections was to be expected, the scale (i.e. 20%) is still daunting. Especially so when compared to competitors. Grifols (GRF.BME), CSL’s Spanish rival, has made significant strides in its plasma collection infrastructure, especially in mainland China (i.e. Shanghai). No further guidance or elucidation was given pertaining to the Vitaeris acquisition, which had at the time of acquisition been conducting Phase III trials pertaining to organ rejection within kidney transplants. The results across Asia also looked particularly messy with a decline of 9% in the Seqirus product line. Again, we reiterate the crucial nature of the APAC region for continued growth. 

My Expectations: The company continues to be a long-term hold for me. But at $274 AUD it remains fully priced and might see some volatility especially as the market digests what is likely to be a less than stellar 2H.

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​Dividend Yield: 1.06% (Assuming a share price of $274.50). Expectation remains that dividends continue to grow at double digits over the long-term.  

Wesfarmers (WES.ASX)

​Wesfarmers continues its fantastic performance and showcases the value add of having a diverse portfolio (not many firms can pull off a conglomerate structure, i.e. GE). For those that insist that brick-and-mortar retail is dead, both Kmart and Officeworks seem to be proving otherwise (at least for now). Kmart’s revenues increased by 9% with Officeworks’ increasing 29%. Target remains a problem child, but management seems to be executing on its omnichannel strategy nevertheless with online penetration increasing to 15.9% in 1H. The numbers are similar with Kmart, increasing to 8.9%. What was interesting delving deeper into the numbers was the increased purchase size for online orders (approx. 2x), with the majority of fulfillment taking place in store.

Across the Chemicals, Energy and Fertilizers (CEF) division however, the numbers are a little less stellar with revenues declining 6.6% and an earnings decline of 7.5%. Much of this may be transitory in nature though, not least due to continued weakness in Saudi contract prices. Given our thesis around commodities such as iron ore and gold, we would hazard a guess that we will likely see a revitalisation of demand for ammonium nitrate as well as sodium cyanide (crucial for gold mining). In other news, progress has been made pertaining to the Mt Holland lithium project (JV with SQM).

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Red Flags & Risks: CEF division is getting increasingly competitive, especially with Orica (ORI.ASX) opening up a new plant in Barrup. Much will be contingent on continued demand from both iron ore producers and a recovery in gold mining (closed due to Covid measures). For retail, temporary closures and continued diminishing of margins as well as rental pressures remain the key downside risks going forward. 

My Expectations: Management continues to deliver. In my previous notes, we mentioned that the failed bid for Lynas (LYS.ASX) was potentially a sign of what management’s focus is likely to be going forward. The Mt. Holland project confirms this. Though, given the trends we have seen, we still feel that Lynas would have been a great addition to the portfolio. We fully expect greater focus to be placed on CEF going forward and turning it around despite increased competition. Nevertheless, kudos to management. 

Dividend Yield: 3.31% assuming a share price of $54.29 AUD. Expectation is that this will stay stable on a nominal basis.