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Rising blood pressure bodes well for CSL

History doesn't repeat but it does rhyme: the next dip in the plasma cycle is here, and that's great news for CSL

CSL shares blood plasma
Key statistics: ASX: CSL
Closing share price 26.04.17: $128.590
52-week high: $130.225
52-week low: $91.620
Most recent dividend: 83.776c
Annual dividend yield: 1.34%
Franking: 0%

The plasma market is a classic case of supply and demand imbalance. Rarely is the market in sync.

It takes seven to nine months to collect the plasma, hold it for safety testing, transport it to the fractionator, then process it into an end product. From syringe to shelf takes the better part of a year, and getting a new collection centre licensed and operational can add two years to that.

Plasma companies need to predict demand nine to 24 months in the future to know how much plasma to collect. Recency bias being what it is, plasma forecasters tend to extrapolate current conditions, so oversupply in one period can lead to a lack of investment in collections, which brings on the next period of undersupply.

Thankfully, the booms and busts are getting smaller and less frequent. The industry has consolidated into a tight oligopoly: no new company has entered the sector in 20 years and mergers have reduced the number from 13 in 1990 to just six today: CSL, Shire/Baxalta  and Grifols, which together account for roughly 90% of the market, and three small European firms that share the rest.

The leading suppliers share a lot of information about collections but there’s no getting around the need for long-term forecasting. The supply-demand rollercoaster is here to stay.

Over the past two years, industry collections have grown at 6%, while demand has increased at 8%. However, collection growth has been heavily skewed in CSL’s favour: the company increased its count of collection centres by more than a third over the past two years, whereas Shire/Baxalta and Grifols increased collections by only 15% and 5% respectively. Smaller companies were in the red.

So CSL looks like being the best positioned to take advantage of the next period of undersupply. And it may already be here.

CSL’s large base of collection centres and expanding fractionators – a significant competitive advantage – meant that production kept up with the sharp increase in demand for antibodies in the six months to December, whereas Grifols and smaller competitor Kedrion experienced supply constraints.

Management expects net profit to increase 18%-20% in 2017, while earnings per share should grow slightly faster due to the company’s ongoing share buyback. That would put the stock on a forward price-earnings ratio of around 32.

If that strikes you as a high multiple, you’re right. Still, CSL is the world’s largest blood products maker and second largest flu vaccine maker – a title that comes with economies of scale and many competitive advantages in research, pricing, manufacturing and distribution.

HOLD

Written by Graham Witcomb

Graham Witcomb

Graham Witcomb is a senior analyst at Intelligent Investor, owned by InvestSMART Group.

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