F&P Healthcare increases earnings guidance
Recommendation
Fisher & Paykel Healthcare has increased its earnings forecast for 2014 (the company has a 31 March year end), from NZ$85-90m to NZ$90-95m, up from NZ$77m a year earlier. Revenue is now expected to be NZ$625-645m based on a NZD/USD exchange rate of around 80 cents.
For the six months ending 30 September management expects revenue from the Obstructive Sleep Apnoea division to increase 'about 14%', indicating that new mask releases are regaining market share. The Respiratory and Acute Care division, which chiefly sells breathing devices to hospitals, should increase revenue by a very impressive 18%.
As we discussed in F&P Healthcare: Result 2013 on 23 May 13 (Hold – $2.66), unwinding hedging arrangements in 2015 could significantly reduce earnings, as hedging profits contributed NZ$49m in 2013 – an incredible 43% of operating profit. Without strong revenue growth or higher margins, earnings growth could slow considerably beyond 2015.
The share price has increased 16% since 23 May 13 (Hold - $2.66) and 41% since our original buy recommendation on 11 May 11 (Long Term Buy - $2.19). Given the company's long term growth prospects, a forecast price-to-earnings ratio of 21 and 3.8% dividend yield doesn't seem excessive. We'll review the situation if/when the stock price breaches our current Sell price of $3.25 but, for now, we're sticking with HOLD.