Soft 1H for Cochlear but Maintaining our AUD 180 FVE

The market didn’t like wide-moat-rated Cochlear’s first-half fiscal 2019 net profit, sending the shares down 8% on the day. We think it was a case of reality not meeting lofty market expectations for the six months just gone. Net profit after tax grew a seemingly impressive 14% to AUD 128 million versus a year ago. However, the result flattered to deceive. It benefited from a lower U.S. tax rate and favourable currency movements. At the pretax line, profit was up a still impressive 10%, but the revenue line was more telling. It grew at 11%, but in constant currency terms, growth was just 6%. Demand for implants was the major source of weakness with volumes up just 5% and revenue flat. Emerging market units grew 15% but developed markets were soft. Cochlear cited increased competition and health budget constraints.