Coronavirus Reduces Near-Term Cochlear Implants in China, but Recovery Expected, Maintain FVE

Despite lowering fiscal 2020 net profit guidance between AUD 10 million and AUD 20 million due to the impact of the coronavirus on the China cochlear implant market, we maintain our AUD 135 fair value estimate for wide-moat Cochlear. We expect the implant surgeries to resume once the infection risk associated with hospital visits in China has diffused based on the pattern played out in the SARS epidemic. As at Feb. 11, the timing around containment of the virus and subsequent resumption of surgeries is unclear and we assume the surgeries deferred in fiscal 2020 will occur over the following two years. Based on our estimates of pricing in this market, we reduce our group forecast fiscal 2019 implant units down 6,000 to 30,437 which represents a decline of 10.7% on the previous corresponding period, or pcp. However, we still expect Cochlear to post revenue growth of 6.8% in fiscal 2020 as we assume lower price points on the China units and around 30% of group revenue is earned from the services segment which we expect to remain unaffected.