Corporate Action: Cochlear Raises Equity, Issue Price Comparable to Our Fair Value, Do Not Subscribe

We foreshadowed Cochlear requiring an estimated AUD 600 million to AUD 700 million in funding in our note published on March 17, 2020, and today the company announced an AUD 850 million equity raise, giving rise to an additional 10% of shares on issue. Capital is required to fund the operations through the current COVID-19 crisis, which is causing widespread deferral of cochlear implant surgeries, and the likely USD 268 million patent infringement penalty due. This confluence of events placed a liquidity crunch on Cochlear. In the absence of an equity raise, we forecasted net debt/EBITDA levels rising to over 6 in fiscal 2021, and now expect the company to carry no debt. We make no changes to our recently updated operational outlook for the company, however, the additional shares on issue would reduce our five-year forecast EPS growth to 5.8% from 6.8%. As the AUD 140 new issue price is not significantly different to our AUD 129 fair value estimate, we make no change to our valuation.