Collected Wisdom

This week we look at CSL, Ten Network Holdings, Sonic Healthcare, Fletcher Building and Federation Centres.

Summary: Analysts believe CSL’s latest purchase of flu treatment RAPIVAB neatly compliments the company’s flu vaccine business, but they don’t think Foxtel’s stake in Ten Network will be enough to offset concerns over the free-to-air network’s increasing competition. Sonic Healthcare’s acquisition of Swiss-based Medisupport was done at a good deal, building materials manufacturer Fletcher Building faces significant challenges ahead and Federation Centres has an attractive yield but is relatively high risk, analysts say.

Key take-out:  Analysts call CSL a “buy” following the purchase of the exclusive rights to commercialise RAPIVAB, with an average 12-month price target of $99.80 – 14 per cent above current levels.

Key beneficiaries: General investors. Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.


Analysts support CSL’s acquisition of flu treatment RAPIVAB, saying that the purchase neatly compliments the company’s existing flu vaccine business.

Last week the blood products and vaccine supplier announced that it had bought exclusive global rights to commercialise RAPIVAB, an intravenous therapeutic that can be administered at hospitals to patients over 18 years old who have the flu.

Under the agreement, CSL will pay US-based pharmaceutical company BioCryst $US33.7 million, $12m in milestone payments subject to royalty approval and an ongoing royalty stream.

Analysts call CSL a “buy” following the update, with an average 12-month price target of $99.80 – 14 per cent above Friday’s close.

CSL is building out its flu empire via the RAPIVAB purchase and the acquisition of Novartis’s global influenza vaccine business in October last year, analysts say.

However, one analyst is sceptical about whether the treatment will be significant for CSL. Though it addresses the need for treatment of acute influenza in hospital emergency rooms, it is a niche market, there are no economics for US pandemic stockpiling and it is at a high royalty rate, the analyst says.

Further, the treatment should take several years to commercialise, another analyst points out.

Nevertheless, analysts think CSL shares are currently undervalued because the market doesn’t factor in enough upside from several product launches over the next two years and is too conservative about the sales growth potential of the company’s flagship immunoglobulin division in the second half of FY15 and FY16.

They highlight a robust demand for albumin, the main protein of human blood plasma which is synthesised and secreted by the liver. It can be used, among other things, to stabilise blood pressure in shock or sepsis patients and to treat burn patients. With tightening supply and an increasing proportion of sales going to China, albumin prices have increased on several occasions this year.

  • Investors are generally advised to buy CSL at current levels.

Ten Network Holdings (TEN)

The proposal for Foxtel to take a stake in Ten Network was done at a deeply discounted issue price and dilutes existing Ten shareholders, but is necessary to strengthen the free-to-air network’s ailing balance sheet, analysts say.

The company announced last week (June 15, 2015) that Foxtel will become a 15 per cent stakeholder via a $77m capital raising at 15 cents a share – well below its share price at 26.3 cents before the announcement.

It also reported that existing shareholders can participate in a capital raising at the same price – raising a total of $154m in proceeds – and that it would become a 25 per cent stakeholder in Foxtel-Fox Sports joint venture Multi-Channel Network, which will take charge of advertising.

Shares in the company have since fallen to Friday’s close of 21.2 cents.

The last time Collected Wisdom covered Ten, most analysts were concerned about Ten’s precarious financial position but acknowledged the key risk to their “sell” calls was merger and acquisition activity.

Foxtel’s stake and the accompanied capital raising is good news for the network: It provides much-needed breathing space and, moreover, enables greater collaboration with content, analysts say.

But it has come on the trade-off of a heavily dilutive capital raising (with a 40 per cent increase in Ten’s share base) and is by no means locked in, they say.

They warn the proposals – which aren’t expected to be completed until October – are subject to regulatory approval. Given the collaboration benefits between Foxtel and Ten, the Australian Competition and Consumer Commission is likely to closely review the proposed deal, one analyst says.

Despite the balance sheet buffer and shared benefits with Foxtel, consensus remains to “sell” Ten. While current ratings momentum is positive, most analysts don’t see it continuing into the second half once MasterChef concludes and Seven and Nine launch new content like the X-Factor and The Voice.

  • Investors are generally advised to sell Ten Network Holdings at current levels.

Sonic Healthcare (SHL)

Analysts are divided over the outlook for Sonic Healthcare shares after the pathology services provider announced its expansion in Switzerland last week.

The company will acquire Swiss medical laboratory group Medisupport SA for $385m in cash and $70m in shares, which will be issued to Medisupport’s founders and partners, and will become the number one player in Switzerland with 13 per cent of the pathology market.

Analysts agree the acquisition is a good deal for Sonic. Not only is it at a favourable price tag of 8 times FY16 earnings before interest, tax, depreciation and amortisation (EBITDA), but it is also highly earnings per share (EPS) accretive – at 8 per cent initially – and carries synergy benefits.

“Medisupport’s strong capabilities in many laboratory disciplines, including genetics, will provide valuable synergy enhancing opportunities for Sonic in Europe and around the world,” said chief executive Dr Colin Goldschmidt.

Following the acquisition, analysts either call Sonic a “buy” or a “hold”. With one publication cutting their recommendation, however, consensus is to “hold” the stock.

The analyst who downgraded Sonic believes consensus numbers are too high and doesn’t see any positive share price catalysts in the near term. Further, governments around the world are facing budgetary pressures and they could cut reimbursement rates more than expected.

However, another analyst says one way Sonic could beat forecasts is to acquire more businesses at similarly attractive deals. Indeed, Sonic is the largest pathology provider in what is a fragmented European market – meaning there is plenty of scope for more purchases.

  • Investors are generally advised to hold Sonic Healthcare at current levels.

Fletcher Building (FBU)

The majority of analysts see Fletcher Building facing several challenges ahead despite the building materials manufacturer reiterating its earnings guidance for FY15 last week.

Fletcher reaffirmed earnings before interest and tax (EBIT) would be in the range of $NZ650-690m for the full year, though deteriorating mining and infrastructure sectors in Australia meant earnings would fall at the lower end of guidance.

While analysts are mixed toward Fletcher Building shares – with a range of “buys”, “holds” and “sells” – most agree the company faces earnings headwinds, particularly in FY16. On balance, consensus is to “hold” the stock.

Analysts negative about the outlook say risks to the share price include turning around Tradelink Plumbing Centres, reviving plastic pipeline systems manufacturer Iplex and filling the earnings gap left following the wind up of the Stonefields residential development and the New Zealand earthquake recovery project.

Along with the headwinds in mining and engineering, there are fears that the market is being too optimistic about residential construction in Australia as well as New Zealand supporting earnings.

But others say they would be surprised if there are any problems over the next 12 months. Iplex has been problematic but it was clear that turnaround would take several years, while civil and infrastructure growth in Christchurch and Auckland should sustain growth.

As Fletcher Building has managed 2-3 per cent price increases recently, margins should expand above consensus numbers, one analyst says.

Shares in Fletcher Building have fallen almost 10 per cent to Friday’s close of $7.41 over the past 12 months.

  • Investors are generally advised to hold Fletcher Building at current levels.

Federation Centres (FDC)

The merged entity of Federation Centres and Novion offers investors an attractive yield but carries higher risks than most of its real estate investment trust (REIT) peers, most analysts believe.

Last week Federation Centres announced a June distribution of 8.5 cents per security and its intention to rebrand as Vicinity Centres following shareholder approval at the AGM in October.

Vicinity Centres will own and manage 102 malls, including Chadstone and the Emporium in Melbourne and Chatsworth in Sydney.

Analysts have been in favour of the $22bn merger since it was first announced in February this year, saying that both sets of shareholders should benefit from substantial cost savings and expansion opportunities.

“These will be important areas of focus for the merged organisation and we are making good progress towards the delivery of these key objectives," said Federation Centres chief executive Steven Sowell in the latest announcement.

However, most analysts say Federation Centres is a “hold” after its share price has risen 15 per cent to $2.95 over the past 12 months.

The REIT’s forecast yield of 5.79 per cent in FY16 and 6.15 per cent in FY17, along with its low-risk profit, is likely to support the share price given its premium to bonds, they say.

However, one analyst highlights that the payout ratio has been put under review. While it hasn’t been reflected in consensus estimates, a change in the payout ratio was expected given that was 95 per cent of earnings and equated to over 105 per cent of free cash flow after capitalising for development items – which is unsustainable, the analyst says.

There are other risks as well. The portfolio of malls is more concentrated in Victoria, which another analyst thinks could result in slower sales in the short term, and is overweight supermarkets – an industry facing significant competitive pressures.

  • Investors are generally advised to hold Federation Centres at current levels.

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