2020-04-04 11:36:021970-01-01 00:00:00

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A Fall On Deaf Ears

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Hearing implant giant, Cochlear Limited (COH) has taken measures and has proceeded to issue its second covid-19-related profit downgrade for the month, retracting on its previous guidance by reason of surgery deferrals across Greater China, and Western and European markets. Formerly, cuts made on the 11th of February entailed a reduction of guidance outlook for FY20 from $290-300 million to $270-290 million. Shortly after, COH then went on to state that they were in no position to provide an earnings outlook to the market, due to the immediate risk pertaining to a high level of uncertainty surrounding the impact of COVID-19.    

As of today, 16th March 2020, Cochlear shares have dipped as much as 20 percent to a low of $169.37 following the withdrawal of its FY20 earnings guidance by cause of coronavirus impacts. In terms of operational exposures to the novel coronavirus, the substantial, short-term negative impact on cochlear implant surgeries is largely due to the fact that operatives driven by discretionary and non-critical demand present greater downside risk, given the lack of severity.

That said, hearing loss is a degenerative condition that often requires elective surgery under general anesthetic and stringent rehabilitation work. Indeed, Cochlear implantation is placing a strain on the healthcare system and has since been urged to reconsider said operations.     

Despite geotechnical headwinds, the business managed to deliver strong growth in implant revenue in its HY20 operational highlights. Specifically, COH delivered a 9 percent increase in sales revenue while Cochlear implant revenue grew by 14 per cent with units growing 13 per cent. Specifically, COH's Nucleus Profile Plus Series has been 'well-received by the market since its launch in FY19' per CEO and President Dig Howitt.    

Unfortunately, however, headwinds have persisted as the impacts of the coronavirus have become increasingly apparent and a subsequent delay in surgeries may continue to impact the lower end of guidance due to the subsequent decline in sales. Anecdotally, throughout the SARS epidemic, COH witnessed a material reduction in sales in China over a three-month period, which was fortunately followed by an uplift as the backlog of delayed surgeries cleared.

Hence, as the virus continues to spread exponentially, while containment remains a concern, the impact of the virus could now spill into the medium term. Notwithstanding a 3-7 per cent cut in FY20 earnings guidance off the back of a sharp decline in elective surgeries in China, it is clear that ongoing concerns in other markets may lead to far more material guidance revisions as volatility continues to persist.    

In an attempt to paint a brighter picture for the global leader in implantable hearing solutions, several factors may mitigate risk in the long run, namely, COH's conservatively geared balance sheet. Indeed, the business has headroom in existing debt facilities to assist with meeting future cash requirements, with total current assets and total liabilities at 635,000,000 and 359,500,000, respectively. Additionally, COH has aimed at reducing all non-essential spending and capital expenditure for the balance of the financial year, adding that disruptions are seemingly temporary.    

Suffice to say, Cochlear's affair with the novel coronavirus accentuates the broader concerns of the global economy. Like most other discretionary stocks, forward-looking statements such as guidance's, forecasts etc. may come under scrutiny or be rendered useless due to unforeseeable nature of COVID-19.   

By Caroline Wong 

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