CSL (ASX: CSL) is one of three tier one plasma therapy companies that benefit from an oligopoly in a highly consolidated market.

Narrow-moat CSL reiterated fiscal 2024 guidance for constant-currency group net profit after tax before amortisation of USD 2.9 to¬ 3.0 billion, implying ¬13% to 17% constant-currency growth on fiscal 2023.

Shares rose $9.80 or 3.73% of the back of the earnings release but are still trading at a 13% discount to our fair value of $315.

Management’s 2024 guidance factors in continued gross margin recovery in CSL Behring and constant-currency group revenue growth of 9% to 11%, largely driven by immunoglobulins.
On the back of the earnings release, Morningstar Equity Analyst Shane Ponraj kept his long-term estimates broadly unchanged but increased his fair value estimate by 5% to AUD 330 largely due to the time value of money and the stronger U.S. dollar relative to the Australian dollar.

Shares remain undervalued as Ponraj still anticipates CSL Behring’s gross margin to recover to its prepandemic level of 57% by fiscal 2027, from 49% in fiscal 2023. This is consistent with management’s timeframe of three to five years.

In line with its stated target, CSL exited fiscal 2023 with cost per litre of plasma collected down 17% from the peak in March 2022. Plasma sources was challenging during the pandemic and the plasma sourcing market is currently in short supply. However, CSL is well positioned having invested significantly in plasma collection centres, owning roughly 30% of collection centres globally.

In the most recent earnings release CSL Behring’s second-half gross margin only improved 25 basis points sequentially to 49%, largely due to unfavourable currency movements, inflationary pressures, and a lag between plasma collections and sales of roughly 9-12 months.

Nonetheless, Ponraj still expect margins to expand as CSL cycles through its higher cost inventory and focuses on continued improvement in its manufacturing yields. In addition, as plasma collections improve, up 31% in fiscal 2023 to record levels, Ponraj anticipates currently elevated donor compensation costs will normalise.

This is likely to drive margin expansion together with operating leverage, as labour and overhead costs scale with normalising collections and volumes.

CSL declared a 10% franked final dividend of USD 1.29 per share. Morningstar forecasts net debt/EBITDA to remain under 2.0 over our 10-year forecast period leaving CSL comfortably positioned to afford our unchanged forecast 44% dividend payout ratio.