Cochlear: Its deafening – new pt starts and clinic capacity
About the author:
- Author name:
- By Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 19 August 2020, 11:00 AM
- Sectors Covered:
- FY20 results were negatively impacted by COVID-19 deferral of elective surgeries, with sales declining across all divisions, margins contracting, underlying profit falling by double-digits and the dividend remaining suspended.
- While Cochlear Implants (CI) fell 8% (2H -26%) and varied across regions, it fared better than expected, with Services (-12%; 2H -23%) and Acoustics (-24%; 2H -32%) taking the brunt of the blow from COVID-19.
- Although CI volumes are recovering in multiple developed markets and China, the extent of supportive patient 'catch-ups' remains unknown, with the lack of FY21 guidance deafening and likely disruption to the new candidate pipeline on clinic closures, lower capacity and ongoing COVID-19 risks.
- We have adjusted our FY21-22 estimates, with rolled forward multiples increasing our target price (Morgans clients can login to view detailed reports and price targets). We remain defensively positioned, with a Hold.
COVID-19 impacts; div remains suspended; no FY21 guidance
FY20 results were negatively impacted by COVID-19 deferral of elective surgeries, with revenue down 7% (A$1,320.6m), underlying income falling 42% (A$154m) and adjusted profit (A$238m, -186%) supported by cA$37m in 'other income' (eg government grants; contingent consideration release) and lower tax (22%, -3pts).
Product sales were down across the board (A$1,352m, -6%; -11% in cc), with Cochlear Implants (CI) declining (A$818m, -8% in cc), but faring a bit better than Services (A$396m,-12% cc) and Acoustics (A$139m, -24% in cc).
GMs fell 120bp to 74.5%, but benefited from lower warranty costs offset by lower production, with opex held flat (A$749m) and A$52m in FX losses/other expenses, seeing margins decline (-10.6pts to 15.3%). OCF fell A$454m, to -A$158m, mainly on A$420m in patent litigation expenses, and the dividend remains suspended.
No FY21 guidance was provided given “significant uncertainty in forecasting revenue”.
CI vols improving in dev mkts; gaining sh; B/S solid; CF breakeven
The key positives include:
- >80% CI surgery started in developed markets by the end of Jun, with volumes broadly in line on pcp across the US, Germany, but slower in the UK, Spain and Italy
- China strong recovery
- Surgical mix by age in developed markets, broadly in line with pre-COVID-19 levels (25% peds/75% adult)
- Countries enabling greater levels of remote access and programming
- US Acoustic Jun/Jul surgery volumes c70% pre-COVID-19 levels, with strong uptake of Osia 2
- Growing R&D investment to extend product position
- B/S remains solid and liquidity strong
- Around CF breakeven
Catch-up surgeries; new candidate pipeline; clinic capacity limited
The key negatives include:
- 'Catchup' surgeries supported recovery of CI, with the adult segment now caught up.
- Little visibility on the new candidate pipeline, with uncertainty around the typical 9-12 months of referrals and scheduling.
- Clinic closures have delayed access to sound processor upgrades, despite remote services.
- Clinical capacity is below historic levels and patients volumes prioritised.Emerging market (c20% of CI revenue) surgeries (ex-China) remain very low, with management not optimistic of a quick recover.
- Uncertainty and variability with Acoustics volumes, with no UK recovery.
- GMs are expected to fall and government assistance programs to moderate.
- No dividend until profitability is sustained.
- There is uncertainly around multiple waves of COVID-19.
Valuation remains extended; waiting for a better entry point
We have adjusted FY21-22 earnings changes and rolled forward our valuation multiples, which sees our DCF/SOTP-based target price increase (Morgans clients can login to view detailed reports and price targets).
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