Analysis of Commonwealth Serum Laboratories Limited (CSL) - Example

Contents Contents 1 Executive Summary 3 CSL Behring 3 BioCSL 3 Research and Development 4 Plasma products 4 Vaccines and pharmaceuticals 4 Company ranking 4 Major competitors 5 Economic Analysis 6 Porters five force model 7 Porter’s Five Forces 7 2. Company analysis 8 Company history 8 Analysis of profitability and risk 8 Core activities 9 Competitive situation 9 The markets they operate 10 3. Financial Analysis 10 Profitability ratio 11 The Liquidity Ratios 12 Leverage ratio 14 Earnings per share ratio (EPS) 14 Bankruptcy Analysis 15 Benchmark comparison with company’s ratio Analysis 16 Liquidity, Asset Management and Leverage Comparison: 16 Profitability and Performance Ratios: 17 4. Valuation 19 Valuation model 20 Free cash flow model 21 2. Dividend Discount Model 22 Comparison of Valuations & Recommendation 23 Conclusion 25 Executive Summary The aim of the report to conduct an analysis in order to appraise the business situation of Commonwealth Serum Laboratories Limited (CSL) which is a public listed company in ASX. The outcome of the analysis will provide a decision as to whether to buy, sell or hold the shares in this company. The analysis will therefore be based on both internal and external factors that affect the business performance of CSL limited as well as employing the dividend discounting model and free cash flow model as an ideal valuation method.CSL is a worldwide biotherapeutics corporation that creates as well as supply innovative biotherapies that save human lives as well as aid individual with life-threatening medical situation live entire lives. The major facilities for CSL are located in Australia, Switzerland, United Kingdom as well as Germany. At present the company has workers more than 14000 employed 30 nations. The company manufactures vaccines as well as plasma protein biotherapies and consequently, the company operates in the following business units: CSL Behring This unit is only engaged in research, development, product as well as supply of plasma product which are employed to manufacture coagulation therapies to treat hemophilia, critical care autoimmune disease as well as used in wood treatment CSL Plasma. BioCSL This unit manufactures as well as supply biological product inclusive of prescription medicine vaccines, anti-venom as well as immunohaematology product. The product there cures and controls the serious human medical situations. 1. Industrial analysis CSL is in four industries as discussed below Research and Development In the financial year 2014/15, the company invested US$460million in research and development activities and thus the centre of excellence for the company is situated across the world as well as they centre on developing latest product and enhancing as well as growing the medical use of current product. Plasma products The company is committed towards being a leader in the manufacture of plasma product. In recent year, the company was leading in plasma industry with a value of US$24 billion. A persistent center on innovation in latest product, enhanced product as well as manufacturing expertise is the major aspect of the company’s growth in this industry Vaccines and pharmaceuticals The company has invested heavily in this industry since, it is the key manufacturer in a US$4 billion influenza industry with more than forty years manufacturing expertise as well as revenue spanning across the globe. BioCSL manufactures sells as well as supply a detailed assortment of vaccines, anti-venom as well as other pharmaceutical products in New Zealand and Australia. Company ranking CSL limited is a public corporation ranked number 48 out of 2000 corporation across Australia. The business creates the majority of the revenue from the pharmaceutical product production in Australia industry. In the year 2015, the business created total revenue of $7,309,815,000 inclusive of sales as Major competitors fizer Australia Holdings Pty Limited 12.80 AstraZeneca Pty Limited 11.50 GlaxoSmithKline Holdings Pty Ltd 9.80 Merck Sharp & Dohme (Australia) Pty Limited 8.30 Aspen Asia Pacific Pty Ltd 8.20 As much as the CSL limited main business performance is at present well established as well as growing, upholding the growth is a big challenge specifically with new companies both local and international. GlaxoSmithKline and Baxter international are some of the key growing competitor for CSL limited but at the same time the competitor puts the pharmaceutical companies to perspective (Damodaran 2011). The company market analysis depict that at least 2% of the customers contact the company via the social societies with other well established companies using professional sites such as goggle+ and linked in to advertise their product which is quite risk when it come to market share for CSL limited in Australia and across the globe. What makes the company more competitive in the market despite this challenge is the company reputation and branding which depicted that the customer loyalty stood at 58% for CSL limited against 18% for Baxter international Economic Analysis The Australia people are need of quality health services and thus CSL limited is committed towards ensuring that these economic factors are met across Australia and the globe. In recent years, pharmaceutical companies have responded to the shortage in manufacture by creating latest capabilities internally, principally by way of employing new employees as well as by way of acquisition of latest platform technologies. The companies have as well appreciated that they will not be in a position to create a new drug by placing more reliance on their own resource hence, they have entered into numerous contract with other biotechnology and other corporations that are working on specific disease areas, and are research on drugs or are creating latest tools as well as services (Hussey 2010). Paralleling the expansion of Pharmaceutical Corporation for the last 20 years has been the robust creation of biotechnology industry. Many human biotechnology corporation focusing on creation of latest drugs are at present large corporations in their own right as well as have as well participated in growingly extensive coalition with the established pharmaceutical and research corporation across the globe Few pharmaceutical companies in Australia have an established business across Australia. Well established companies such as GlaxoSmithKline have important information as well as production plant whereas others such as ELI lilly and CSL have made substantial venture in clinical test. Csl limited is largely impacted by the performance of well established pharmaceutical company such as Fauldings (now part of Mayne Health), Sigma Pharmaceuticals and Australian Pharmaceutical Industries who manufacture and distribute wholesales product. Their engagement in technology development is small Porters five force model Porter’s Five Forces This model is important tool in appraising the competitive environment for CLS limited since, mapping the numerous force that impact the industry, will help to appraise the business situation in the market as well as aid in planning for business plan the power of competition among the pharmaceutical industry is high to medium since, there is free entry or exit in this industry. The brand name is a powerful tool that makes CSL corporate entity with recognizable product globally (Hooke 2010). In Australia's market with market leaders, there is less rivalry between players but there is a significant factor to be taken into consideration is that I doesn’t cost a thing to change from one pharmaceutical company to another, consumer loyalty in this industry is very common there is an massive bargaining power y promoters, they are very sensitive and the price of the product is under high pressure from well established firms across the world which implies therefore that the customers are the ultimate person to chose the best pharmaceutical company that best suits their needs. The threat of new entrant in the market is another pressure that affects the business performance since, the defined market share and thus brand name is a strong differentiator in pharmaceutical industry. The threat of the substitute products such as the GlaxoSmithKline supply which current hold a large portion in the market is a threat to the business situation for CSL limited. 2. Company analysis Company history In understanding the historic performance of the company, we employed the five yeas financial statement as well as employ the ratio analysis in understanding the business trend each year as well as provide conclusion on whether the company is performing well or not. The forecasted hypothesis depicts an increasing trend in business performance for csl for the last five financial periods. CSL is a worldwide biotherapeutics corporation that creates as well as supply innovative biotherapies that save human lives as well as aid individual with life-threatening medical situation live entire lives. The major facilities for CSL are located in Australia, Switzerland, United Kingdom as well as Germany. At present the company has workers more than 14000 employed 30 nations (Kupe Kupersmith 2013). Analysis of profitability and risk The financial performance of CSL was appraised using the ratio analysis for the last five years. The outcome of the ratio analysis provides an assurance as to the company profitability and liquidity performance. It can be observed from the financial analysis that the earning per share for the company has been growing which implies therefore that the value of the company stock price in the security market has been improving as well. The company is experience a decline in cost of debt which will lead to an increase in value of return on equity and return on asset which in turn leads to an increase in profitability ratio for the business. Core activities CSL is a biotechnology corporation that is centered towards research, development, manufacturing as well as promoting its product to prevent as well as treat human medical situations. Some of the core activities entail supply of vaccines, anti-venoms, pharmaceuticals, immunology treatments. The company is a protein science business with its core activates being the collection, fractioning as well as supply of human blood across Australia and the globe. The company manufactures vaccines as well as plasma protein biotherapies and consequently, the company operates in the CSL Behring which is a unit that is only engaged in research (McDaniel 2014), development, product as well as supply of plasma product which are employed to manufacture coagulation therapies to treat hemophilia, critical care autoimmune disease as well as used in wood treatment CSL Plasma. BioCSl is another unit which manufactures as well as supply biological product inclusive of prescription medicine vaccines, anti-venom as well as immunohaematology product. The product there cures and controls the serious human medical situations. Competitive situation The company is a leading business across Australia and because of the company size; it manages its cost better unlike their competitor. The pricing for CSL’S product may change from market to market, but while competitors at times change product to the market offering the best margins, CSL produce plenty supply to meet the demand in the market (Nersesian 2004). The permits the company to create a good standing for reliability as well as benefit from entire chances of making profit easily. The company makes the world better by reaching the entire market globally at any time; the presence of blood product is significant to healthcare system which makes csl the best company. With an online research provide that the number of new visitors searching in the company website for product and service offered grew by 25% from last year unlike their competitors. the career section for CSL is experience a massive search and application with more than 65% unlike their competitors which is an indication that the business is a market and price leader and thus the business is liked by many both the job seekers as well as the customers. The business was awarded for best outstanding equal employment chances for all plan as well as it the Australia’s second company to attain a share price of $100. The markets they operate CSL has invested in biotherapeutics market for the manufacture and supply of innovative biotherapies that save human lives as well as aid individual with life-threatening medical situation across the globe. The major facilities for CSL are located in Australia, Switzerland, United Kingdom as well as Germany. Currently the business produces the vacci9ne as well as plasma protein biotherapies and consequently. 3. Financial Analysis The financial analysis is an important tool in appraising the business performance for CSL. In this analysis, we will perform ratio analysis in order to understand the company’s liquidity, profitability as well as efficiency ratio as well as perform benchmark analysis with Baxter international which is the top competitor for CSL limited. The outcome of the ratio analysis will provide an analysis in appraising the viability of the business situation for CSL limited (Hussey 2010). Profitability ratio The graph below depict the profitability trend for CSL limited for the five years period ending 2015.it can be observed that there is an increasing trend in net profit after tax (NPAT) with high cost of goods sold due to growth of the business . The growth in business has been attributed by the supply of quality product at an affordable price globally which lead to high demand in company’s product. The above analysis provides that the company is making huge revenue with high cost of goods sold as compared to net profit after tax (NPAT). This implies therefore that the rate of COGS is growing at an alarming rate unlike the net profit after tax. It implies therefore that the company should ensure that the quick ratio is improved since, this will lead to reduced cost of goods sold and increased net profit after tax. Ratio Analysis for CSL limited From the above graph analysis, it can be observed that there is an increasing trend in all ratios which is an indication that the company [performance is improving since, the returns on equity is positive due to improved net profit and its margin. as a result, investors will be encouraged into the business leading to as growth in value of stock price in the security market. The Liquidity Ratios This ratio explains how fast a business will raise funds where necessary to finance business operations. This ratio entails the current ratio and quick ratio in order to ascertain the extent to which the ratio will be able to meet the company’s liabilities as well as guarantee the going concern assumption of the business. It can be observed from the above graph that current ratio is enhanced and growing each financial period with a value of more than one. This is an indication that the company working capital can fiancé its daily operation as well as ensure that the business daily operation is improved and thus the liquidity risk is minimal. The value of quick ratio is as well improving which is an indication that the company inventory is mapping faster which has a direct impact on value of reported sales and net profit. Leverage ratio It can be observed that there is a decline trend in interest overage ratio which is an indication that there is steady borrowing by the company. The growth in dividend per share implies therefore that the business retained profit is growing each year due to improved business operation as well as meeting the demand target globally (Tom K. Lloyd 2013). As a result, the growth in dividend per share is an implication that the reserve ratio grows each and consequently improving the capital structure in order to expand the business growth. Earnings per share ratio (EPS) The graph below depicts a growing trend in EPS due to growth in reported net profit and sales. In this regards, the growing trend in earning per share implies that the business viable for investment since, an investor will be guaranteed returns on investment as observed by the trend in earning per share in the graph below. . Bankruptcy Analysis In undertaking the bankruptcy analysis for CSL, we will employ the Atman’s Z score model which is model that appraises the company situation the basis of probability. The Altman Z-score model provides that the probability of 1.8 implies that there is high chance of bankruptcy whereas the score of 3 implies that there is loc chance of bankruptcy. A score ranging 1.8-3is an ideal for best business. The similarity of the trend between the market value as well as the Altman Z-score model graph provide proof that the market worth of the company by closely assuming the risk of the debt of the company which is obvious at the time of economic down town or company own financial inadequacy. Z-score model= {1.2(Networking capital/total Asset) +1.4(Retained earnings/total asset+3.3(EBIT/total asset) +0.6(Market value of equity/Book value of liability) +1(sales/total asset)} From the above graph analysis of Altman Z-score, it can be observed that value is growing and thus the company will not go bankrupt any time soon and thus it can be concluded that the business is an investment opportunity since, the company is improving each financial year with a decline trend in bankruptcy rate. Benchmark comparison with company’s ratio Analysis The company ratio analysis is benchmarking with Baxter International which company’s top competitor in the market. Liquidity, Asset Management and Leverage Comparison: At the time of benchmark the company performance with Baxter international, the competitor hard little changed in its liability whereas the CSl has to a great extent changed in size in terms of capital bases as well as the level of reported net profit. Nevertheless, as we depict in the graph analysis below, it can be observed that CSl is strongly following the trend in benchmark assessment between the companies trend in current ratio. Profitability and Performance Ratios: The benchmark of company’s profitability ratio between CSL and Baxter international provides that CSL is superior and better positioned in the entire characteristic of profitability as well as the predominance ratio. This is observed by the trend in the price earnings ratio which is more stable for CSL unlike for Baxter international. The market the book value ratio provides that CSL limited is superior. This factor is attributed by the global market penetration as well as price leader of the product in this industry by CSL limited which makes the company superior to barter international (Tull 2003). It can be observed therefore that the overall performance analysis for CSL is improved unlike those of their competitors Baxter international. This is due to the fact that the business as a global branch with an affordable price in the market. The company is committed toward ensuring that it provide quality product that meets the customers’ demands in the market globally. 4. Valuation CSL is a global business with intricate business transaction which turns to be an intricate model assessment for the study. it is significant to simplify the forecast and consequently we focus on employing the data released each financial year to develop a forecast of business situation for the company in which case the forecast will be based on some assumption about business situation such as the business will not have a capital investment from 2011 onwards with no new venture in relation to subsidiary venture other than the equity balances. This will makes the business therefore focus on creating more net profit from its existing business operation across Australia and globally. It is apparent that CSL is a global business with investment in four diverse industries which as a result would imply that the valuation of company performance will be an intricate exercise that commands detailed understanding of business operation as well as employ an appropriate valuation technique in valuing the company performance in order to ensure that the result of the valuation is correct, precise and reliable for investment decision making. Required rate of return on equity capital We will employ the capital asset pricing model in order to create the discounting rate to be employed in the valuation of company. CAPM = {Risk Free Rate of Return + (Beta) x (Market Risk Premium)} The beta if derived from an assessment of change in share price for CSl in comparison with the change in market index in order to realize the covariance of returns for CSL limited as well as the entire ordinaries index. This is then divided by the variance of the returns. The risk free rate of return is assumed to be the rate of return on venture in which there is zero risk in which it is hard to realize an investment with this kind of risk since, risk cannot be foreseen as a result, we will employ the government bond as a risk free rate for return. We employed therefore the 5.5% ten year government bond (Tull 2003). The value of Beta is less than one which implies therefore that the value of stock is below the market value as well as the required rate of return is equally below the market return. A beta worth greater than one implies therefore that the value of stock is very volatile unlike the market which implies therefore that they require rate of return is equally greater than the market return. from the analysis, it can be observed that value of beta is 1.1 which implies therefore that the shares of CSl limited is very volatile in the security market as compared to the value of market stock . In this regards, the equity venture must be prized with returns that is higher than the market return which is standing at {5.5%+6.5%) = 12%}. Where 5.5% is the value of beta and 6.5% is the value of MRP. The capital asset pricing model above provides that the required rate of return is 12% which is considered as the relevant discounting rate for the employment in valuing the CSL equity as well as in compliance with the Beta and Market return of stock (Hooke 2010). The growth assumption is significant to valuation of CSL equity and its outcome. The effect is that it will have an impact on the steady worth of the company and consequently employs the growth rate which is linked to the anticipated growth in the economy devoid of among forecast on the gross domestic product for Australia’s economy, in this regards, we deemed appropriate to employ the GDP rate of 4.2% since, this is an average rate as per the indexmundi 2015. Valuation model We will therefore employ the following valuation model in appraising the business situation of CSL limited which is the free cash flow model and the dividend discounting model. Free cash flow model centers on the value of cash inflows which lead to an increase the capability of the company’s dividend payout ratio whereas, the dividend discounting model centers the real dividend paid out. The two valuation model are significant to the valuation of CSL limited since, the business appreciates the worth of cash as well as aim at reducing the dividend pay and reducing the share price as well (Krishna G. Palepu 2007). Free cash flow model To value the CSL limited, the free cash flow model will focus on valuation of equity and debt of the company in order to appraise the value of the operating capital in terms of the net asset and liabilities for the company. The free cash flow is an amount existing to equity holders of the company which are significant for in valuing the share price of CSL limited as well as we employed the cost of equity (Ke) to act as the discounting rate. Which is explained in the table below? 30/06/2015 30/06/2014 30/06/2013 30/06/2012 Total Cash Flow From Operating Activities 1,364,000   1,361,000   1,312,000   1,206,000   Total Cash Flows From Investing Activities -413,000 -402,000 -450,000 -322,000 Total Cash Flows From Financing Activities -828,000 -1,137,000 -1,219,000 -195,000 Free cash flow for common equity holders 126000 -178000 -357000 884000 2015 2014 2013 2012 2011 Total Discounting factor (10%) 0.909 0.8264 0.7513 0.863 0.6309 PV net dividend 695,394 677,340 648,636 551,094 435,900 Net dividend 632113.146 559753.776 487320.227 475594.122 275009.3 2429791 Continuing value 3,567,756 PV of containing value 3243415 Sum of PV Net Dividend 2429791 Total 5673206 Adjust to midyear discounting 106% Total PV Dividend 6013598.36 Current shares 464,832,827 Estimated value per share 0.01293712 12.9$ per share Current market price per share 90.2$ per share Confidence level 5% Recommendation Sell 2. Dividend Discount Model The model calculates the value of the company on the basis of dividend paid to shareholders. The justification for using this model to value the company is that dividend portrays the real cash flow to be paid to shareholders and thus appraising the present value of cash flows should provide a value for the extent of shares worth. Valuation of CSL limited under this model is outline below. 2015 2014 2013 2012 2011 Dividends Per Share 1.5 1.4 1.3 1.1 $0.8 Earnings Per Share 378.5 349.5 314.5 255.5 173.6 The trend in DPS and EPS is increasing in the above table due to growth in value of CSL limited each year. This is because, the company has higher retained earnings for venture as observed by the growth in DPS and EPS. The approach is significant since the company depict a steady growth rate in dividend per share and earning per due to constant cash inflows. The following valuation is therefore made in concluding on the viability of the company’ stock price. 30/06/2015 30/06/2014 30/06/2013 30/06/2012 PV net dividend 695,394 677,340 648,636 551,094 Issued common stock -1,241,000 -1,539,000 -1,669,000 -517,000 Dividend to common equity 126000 -178000 -357000 884000 2015 2014 2013 2012 2011 Total Discounting factor (10%) 0.909 0.8264 0.7513 0.863 0.6309 PV net dividend 695,394 677,340 648,636 551,094 435,900 Net dividend 632113.146 559753.776 487320.227 475594.122 275009.3 2429791 Continuing value 3,567,756 PV of containing value 3243415 Sum of PV Net Dividend 2429791 Total 5673206 Adjust to midyear discounting 106% Total PV Dividend 6013598.36 Current shares 464,832,827 Estimated value per share 0.01293712 12.9$ per share Current market price per share 90.2$ per share Confidence level 5% Recommendation Sell Comparison of Valuations & Recommendation The share price for CSL limited as at 30th June 2015 was $12.9 according to free cash flow model as well as dividend discounting model, the recommendation for the analysis is that an investor should sell the share price in this company since, the share price is below the market price per share. It can be observed that the use of dividend discounting model and free cash flow model would to the same result in valuing the stock price for CSL limited. FCDM values the stock price on the basis of cash flows generated and existing for company’s equity holders whereas dividend discounting model value the stock price on the basis of percentage of free cash flow to equity holders that is paid from dividend. Provided the absolutely high and justifiable hypothesis for growth rate in sales by 28% yearly employed in the financial forecast, it astonishes that the valuation of CSL was low unlike the market value which implies therefore that the market is assuming a steady growth rate for CSL limited unlike our growth hypothesis. In making a forecast, we assumed that the company shall pay no dividend beyond the historical payout ratio; nevertheless, devoid of further venture CSL limited may be in a position to grow its dividend payout since it may not require creating its cash reserve ratio as observed in the previous. In understanding the valuation of CSL stock price, we employed the goal seek function in order to realize that the company shall require a target stock price of $12.9 per share if the company is to realize a 10% growth rate in dividend payout ratio. Conclusion The Financial situation of CSL limited is therefore better and improving each financial year with caution on investing in its stock since, they are undervalued which might in turn lead to loss in value. the basis of our valuation was made based on appraisal of the company’s statement financial position, the income statement as well as cash flows in working out the company key ratios as well as understanding the value of the company in order to ensure that information provided was not misleading to the users of the report. Our finding and conclusion is therefore subject to comprehensive analysis of both the internal and external factors that impact the business performance and thus we believe that out opinion will not be biased but provide a true and flair view of the company’s financial situation as well as whether to buy, hold or disposed the shares in this company (Tom K. Lloyd 2013). It was therefore concluded that CSL limited is not an ideal venture since; the company is having a superior business performance with an undervalued stock price with valuation of $12.9 and a share price of $15.4 which depict a low intrinsic value as compared to the quoted stock price. The impact of undervalued stock price is that it will lead to decline in value of stock price in the market and consequently a loss to an investor in this regards, we advice that an investor should consider selling stock in this company in order to avoid risk of loss (McDaniel 2014). Reference list Damodaran, A 2011, The Little Book of Valuation: How to Value a Company, Cingage Learning, London. Hooke, JC 2010, Security Analysis and Business Valuation, John Wiley & Son;s, New York. Hussey, R 2010, Fundamentals of International Financial Accounting , Cingage learning, London. Krishna G. Palepu, ‎MH‎LB 2007, Business Analysis and Valuation: Text and Cases - Page 12, Springer, Sydney. Kupe Kupersmith, ‎M‎M 2013, Business Analysis For Dummies, John Wiley, New York. McDaniel, T 2014, Valuing and Selling Your Business:, Springer, Sydney. Nersesian, RL 2004, Corporate Financial Risk Management, John Wiley & sons, New York. Tom K. Lloyd, S 2013, Successful Stock Signals for Traders and Portfolio, Cingage Learning, London. Tull, C 2003, Mastering Business Analysis with Crystal Reports 9, Springer, Melbourne. Read More