Australia’s Cochlear wants to buy govt hearing service, raises profit outlook on soaring Chinese sales

(Reuters) – The Australian government said it is weighing a proposal from a consortium including hearing implant maker Cochlear Ltd. (ASX:COH) to buy a state-owned hearing service, a move likely to create headwinds from an electorate sensitive to privatised health.

In a statement on Friday, Finance Minister Mathias Cormann said the government was approached by a group which also includes the Royal Institute for Deaf and Blind Children and Sydney-based Macquarie University.

“The government will formally examine the proposal put forward by the consortium,” the statement said, without giving a dollar value of the service. Australian Hearing’s latest annual report says it grew pre-tax earnings by 77% to A$33.2 million in fiscal 2014/15.

A sale would be a tough sell for a conservative government already under pressure to prove it will leave Australia’s subsidised public health system intact while it looks for ways to cut spending.

The government last year completed a scoping study into the possible sale of the hearing service, Australian Hearing, but postponed making a decision on whether to proceed, under pressure from opposition politicians and the health sector.

Federal and state governments are feverishly selling assets to cut debt and fund capital works amid a massive decline in tax receipts from the mining sector due to the commodities downturn.

The federal government in 2014 sold state-owned health insurer Medibank Private Ltd in a sharemarket listing for A$5.8 billion.

It is also considering bids for the registries arm of the Australian Securities and Investments Commission, a sale expected to fetch about the same as Medibank.

Cochlear Ltd , the world No.1 hearing implants maker, issued an earnings upgrade on Thursday, sending its shares to a record high, as new offerings and rising demand from China pushed first half profit above analyst forecasts.

The Sydney-listed maker of two-thirds of all hearing implants sold globally posted a A$94 million ($67 million) net profit for the six months to Dec. 31, up 32% and better than analyst forecasts of about A$86 million, and raised its full-year forecast from A$180 million to A$190 million.

Cochlear shares leapt 14.4%, smashing through the A$100 barrier for the first time to reach a high of A$104.53 by late afternoon. The stock is up around 9% so far this year, while the broader market is down 9%.

The result vindicates the company’s investment in R&D for new product offerings, of which it launched several in 2015. It also spells a return to form for a perennial market darling which has since 2011 been punished by investors for missing forecasts and a product recall.

It also marks a deepening of the company’s exposure in China, where it reported an increase in sales to non-government consumers, ending uncertainty about whether it can grow sales in the world’s biggest economy once a government contract runs out.

“If you took the China tender business out, the business from the private pay would have still been up 35, 40%,” said Cochlear Chief Executive Officer Chris Smith in a telephone interview, referring to the shift from Chinese government to private sales.

Sales to the Asia Pacific leapt 69%, partly helped by the sale of 1,700 of the company’s units to the Chinese government during the six-month period, from none the previous first half.

Cochlear said in a statement it would sell a further 2,400 hearing aids to China in the remainder of fiscal 2016 and 2017. Beyond that, the Chinese government is expected to allow individual provinces to run their own separate tenders for hearing implants.

“I don’t think we’ll see any impact in the short term, but in the long term, over a 20-year period, that could be a significant contributor to revenue,” said Morningstar analyst Chris Kallos, referring to private sales in China.

Sales in Cochlear’s biggest market, the United States, jumped 35%, helped by a weakening Australian dollar, and in Europe, its second biggest, rose 16%.

The company declared a A$1.10 interim dividend, up from 90 Australian cents.

($1 = 1.4075 Australian dollars)

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