F&P Healthcare: Result 2019

For a company that built its reputation selling CPAP masks, Fisher & Paykel Healthcare is struggling to get people to buy them. Strong competition from the likes of ResMed caused mask sales to decline in the second half of the financial year for the first time since 2012.

At least part of the reason is that the company experienced delays releasing a new range of masks this year, so ResMed and other suppliers were able to pick up additional customers with a better current line-up. This contrasts with the last few years where F&P Healthcare was the competitor with the most releases, allowing it to increase its share of the market. 

While the decline in mask sales is disappointing and we expect the company to continue to lose market share in the short term, the situation should improve in 2020-21 thanks to the company's new full-face mask scheduled for release in the US later this year.  

F&P Healthcare's other segment offset much of the frustration in masks. The Hospital division, which sells respiratory humidifiers and accessories, increased revenue 11% after removing the impact of currency fluctuations, driven by a 20% increase in sales of consumables and devices used in non-invasive ventilation.

The company's Optiflow nasal high-flow therapy has been a big winner for the Hospital business, which now accounts for 60% of revenue. Management estimates that three million patients used Optiflow products over the past year. 

10 digits

Total revenue passed the NZ$1.0bn mark for the first time, increasing 8%, and the gross profit margin increased slightly to 66.9% due to more sales coming from high-margin products. 

This result is stranger than it looks, though: most of the company's margin improvement over the past few years has come from shifting manufacturing to Mexico, where operating costs are lower. Average selling prices have tended to decline. However, in 2019, Mexican output was flat at 34% of total output, suggesting it had reached maximum capacity. The company is, however, expanding the Mexican plant so capacity should increase in future years, with the gross margin hopefully increasing along with it. 

F&P Healthcare invested a record NZ$100m in research and development (R&D) this year, though the amount of spending decreased as a proportion of revenue from 9.6% to 9.4%. This helped net profit rise 10% to NZ$209m.

Management expects revenue of NZ$1.15bn in 2020 and net profit of around NZ$240-250m, up 17% using the midpoint of that range at constant exchange rates. That's impressive on the face of it but, with revenue growing a modest 7%, most of the expected profit growth will come from one-off items, such as a reduction in legal expenses and currency hedging benefits.

The stock trades on a price-earnings ratio of 36. While the Hospital division is doing well and we expect new product releases to stem the loss of market share, F&P Healthcare's underlying growth has slowed materially over the past year, which makes it hard to justify such a lofty valuation. We're sticking with SELL.