Cochlear Update
5 October 2011:
Since the Cochlear recall announcement in mid September, a number of our clients have been keen to know if any further information has come to hand and to understand Hyperion's ongoing response. This is understandable given the size of the holding in the portfolio.
Firstly, there has not been any further material company news and we were not expecting any given the nature of the recall. Understanding the cause of failure with some of the implants will take time and we anticipate Cochlear will need months rather than weeks to identify and then rectify the fault.
In the meantime, surgeons are continuing to implant the older version Cochlear devices which, when combined with the latest model sound processor, provide the same hearing performance to patients as the newer implant device.
Since the implant recall was announced, the Hyperion Investment Team has spent significant time analysing the investment implications of the recall. After careful consideration we have reduced our terminal valuation estimate in 5 years’ time by 14% - made up of a 7% reduction in terminal price-earnings ratio and a 7% reduction in terminal earnings-per-share and we now calculate the 5-year internal rate of return (IRR) for Cochlear at just over 28% pa compared to 21% pa prior to the recall announcement. Normally an IRR increase of this size, with all else being equal, would trigger a buying signal from our investment process but the increased risk and decline in confidence ratings have cancelled out some of that buying signal.
Given the increased risk and lower confidence, we have slightly reduced Cochlear’s target weight within our portfolios. So while Hyperion did take advantage of the large decline in the company’s share price by buying more Cochlear shares in some portfolios to adjust the weighting to the new target weight, the amounts involved have only been modest and we are comfortable with our current exposure.
The information in this document was prepared by Hyperion Asset Management, ABN 80 080 135 897 AFSL 238 380. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. This document does not take account of any person’s objectives, financial situation or needs and before acting, an investor should consider the appropriateness of the investment having regard to their objectives, financial situation and needs. This document is provided to the recipient only and must not be copied or passed on to any other person without the consent of Hyperion Asset Management. Past performance is not an indicator or guarantee of future performance. Hyperion Asset Management believes the information contained in this communication is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk.
