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Cochlear Ltd Response To Coronavirus Outbreak Resulting In Withdraw Of FY20 Earnings Guidance

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Cochlear Limited (ASX: COH) is a medical device company that designs, manufactures and supplies implantable hearing solutions. Cochlear has provided more than 550,000 implantable devices, helping people of all ages to lead full active lives. Cochlear has a market capitalisation of A$9.97 billion.

 

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Update on Coronavirus

The coronavirus (COVID-19) was first reported from the Wuhan province in China on 31 December 2019. The World Health Organisation data shows a total of 190,600 confirmed cases and 7,700 deaths globally. As of Thursday (19 March 2020), there have been 454 confirmed cases and 5 have died of COVID-19 in Australia. The Federal Government has upgraded its travel advice ban to a ‘Level 4’ for the entire globe due to the outbreak of COVID-19 on Wednesday (18 March 2020).

Update on share price

In the last month, Cochlear’s share price has fallen by 24.7%. Cochlear is currently trading at around A$173. The downward trend is due to several countries deferring surgeries as a result of the spread of COVID-19.

How COVID-19 effects Cochlear?

Due to the spread of COVID-19, a growing number of health authorities either recommending or enforcing elective surgery deferrals. This is resulting in substantial short-term negative impact on the number of implant surgeries undertaken. On Saturday (14 March 2020), the US Surgeon General has urged hospitals and healthcare establishments to consider suspending surgical procedures in order to reduce the strain on the healthcare system until the rate of infection of COVID-19 is under control. Further, Cochlear expects these actions from authorities will impact surgeries in major markets, particularly in the US and Western Europe. However, Cochlear expects many of the delayed surgeries to be recommended once hospitals resume normal operations.

Cochlear has implemented a range of strategies to respond to the reduction of surgeries including reducing all non-essential spending and capital expenditure for the balance of FY20. Additionally, Cochlear will also implement a hiring freeze during this disruption and there are no plans to reduce the workforce.

However, after the delay in surgeries during February in China, a small but growing number of surgeries have recommenced over March. Cochlear’s Chinese suppliers have resumed production of components and the business currently possesses at least three months of inventory to enable continued supply of products to customers.

What is the outlook for Cochlear?

Based on year to date results, Cochlear has been on track to deliver earnings guidance driven by strong growth in implant sales across the developed markets. However, Cochlear now expects to experience a decline in sales in the short-term. Due to the uncertainty surrounding the impact of COVID-19 in terms of the extent and duration of the reduction in surgeries and the ability for recipients to access sound processor upgrades places the Cochlear in an unfavourable position. Consequently, Cochlear is not able to provide earnings outlook and as a result Cochlear withdraws its earnings guidance for FY20.

On a positive note, Cochlear possesses a conservative balance sheet and headroom in existing debt facilities. Further, the global leader in hearing solutions is confident the business can arrange an increase in debt facilities to assist in meeting future cash requirements during this period. Furthermore, the strong balance sheet enables Cochlear to withstand the expected short-term decline in demand caused by COVID-19.


 

Disclaimer:


This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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