Investors Deaf To Cochlear Growth Story

By Glenn Dyer | More Articles by Glenn Dyer

No thumbs up from investors yesterday to the 2017-18 annual result from Cochlear, the hearing implant pioneer.

Despite delivered a strong 10% increase in adjusted net profit for the year to June and rewarded shareholders with higher final dividend the shares fell more than 8% at one stage before steadying.

Final divi was lifted 14% to $1.60 a share pushing total payout for the year to $3 a share, up 11% on 2016-17 and 70% of net earnings, which is the board’s target.

That was after Cochlear delivered net profit of $245.8 million, an increase of 10% (10% in Constant Currency), which was within the guidance range of $240-250 million.

But investors went, ’nah’ and dropped Cochlear shares before they recovered somewhat in the afternoon to end the day down 3% at $192.75. (Watch for something similar when CSL reports on Wednesday).

Not even company forecasting another 8% to 12% (similar to 2017-18) rise in earnings this financial year was enough to convince investors who wanted profits.

Cochlear shares have enjoyed a solid run up this year – peaking at an all time high $208.60 in late July from a low of around $162 in mid January, a gain of around 25%.

CEO Dig Howitt said in yesterday’s statement that, “Cochlear continues to deliver on its objective of delivering consistent revenue and earnings growth over time.”

Cochlear said 2017-18 had "been a big year, with a focus on building awareness and market access to cochlear implants, up-weighting our marketing activities and customer servicing capability while maintaining our commitment to product innovation through our extensive investment in research and development (R&D).”

“Our investment in sales and marketing activities is building awareness of and access to implantable solutions and driving market growth. The investment in R&D continues to strengthen our leadership position through the development of market-leading technology. And by delivering a world-class customer experience, we empower our recipients to connect with others and live a full life,’ the cEO said yesterday.

“In FY18, the business delivered manufacturing efficiencies from improvements in its warranty and repair functions. These gains were reinvested into our market growth activities with the net profit margin maintained.

“We have a strong balance sheet and delivered operating cash flows in excess of net profit, enabling the business to fund capital investment, reduce debt and increase dividends to shareholders,” he said.

For 2018-19 Cochlear is targeting a net profit in the range of $265-275 million, an 8-12% increase.

Mr Howitt said, “Growth is expected to continue across the business in FY19, underpinned by the significant investments made in product development and market growth initiatives over the previous few years.

“We will continue to invest operating cash flows in activities aimed at building awareness and market access, with the objective of delivering consistent revenue and earnings growth over the long-term. Through disciplined investment, we are targeting to maintain the net profit margin, reinvesting any efficiency gains, currency or tax benefits into market growth activities.

“Over the next few years, we have a number of large long-term investment projects including the development of our China manufacturing facility, with the construction phase expected to be complete by the end of FY20, and investments in IT platforms to strengthen our connected health, digital and cyber security capabilities. These projects are expected to increase capital expenditure levels to $80-100 million per annum over the next few years.

“The balance sheet and free cash flow generation remain strong and we continue to target a dividend payout ratio of around 70% of net profit.”

He said the key guidance considerations for FY19 are:

  • Expect growth across the developed markets, which represent around 80% of cochlear implant revenue, to continue;
  • Emerging market growth rates over time continue to be strong, however, annual growth rates can be variable driven by the timing of tender based activity and macro-economic conditions; and
  • Continued investment to retain market leadership and drive long-term market growth with the target of maintaining the net profit margin.
Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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