F&P Healthcare: Result 2013

Fisher and Paykel Healthcare’s revenue for the year ending 31 March rose 8% to NZ$556m. Net profit climbed at a swifter pace rising 20% to NZ$77m thanks to cost savings and price rises. Dividends for the half were flat at 7.0 NZ cents per share (ex date 17 June), bring the annual total to 12.4 NZ cents. Non-New Zealand shareholders will also receive a bonus 1.235 NZ cents per share in lieu of New Zealand input tax credits.

Respiratory Care continues to shine

As at the half-year result (see 22 Nov 12 (Hold – $1.96)) F&P Healthcare’s Respiratory and Acute Care (RAC) division – which sells breathing devices for use in hospitals – contributed most of the headline growth, with sales up 11% to NZ$302m. This division continues to provide welcome diversification and was partly behind our original upgrade (see F&P Healthcare: An awakening from 11 May 11 (Long Term Buy – $2.16)). It's Optiflow oxygen therapy products remain popular, helping reduce the length of stay in hospital, and elsewhere it's growing the division with products to help with breathing during surgery. 

The Obstructive Sleep Apnoea (OSA) division’s performance was more sluggish, with revenue rising 3% to NZ$236m. As with previous periods it was higher margin mask products that continued to excel, with revenue growing 10%, while the company's continuous positive airway pressure (CPAP) machines had a tougher time winning sales against competitors ResMed and Philips Respironics. 

Still, the OSA market remains very favourable with only 20% of OSA suffers receiving treatment. This creates an excellent tailwind, with the market expected to grow at above 5% per year for a long time yet.

A growing market helps shield F&P Healthcare from competition: when there’s plenty of work to go around companies don’t focus on wiping out the opposition. And by focusing on its RAC business and masks rather than competing head on in the CPAP machine market, F&P Healthcare has created a profitable niche – although there is some concern that ResMed is attempting to compete in the hospital market.

Pleasingly, gross margins rose by 2.1 percentage points to 55.3% this year as the company's new manufacturing plant in Mexico helped reduce costs and new products helped increase prices. Further cost savings are expected next year too. A shift in sales mix towards higher margin masks and newer feature-rich CPAP machines should also help.

The new plant, though, has increased debt, and debt to equity remains well above the company's sub-20% target. Dividend increases are unlikely until debt is reduced.

Be wary of hedging impact

Management is expecting high teens profit growth in 2014, although growth in 2015/16 may prove more difficult. An unwinding hedging arrangement means reported profits will most likely be flat in 2015/16.

We missed an opportunity to buy F&P Healthcare in mid 2012 when the share price fell to around $1.50, as we were concerned about the loss of market share in masks to ResMed and what effectively amounted to a profit downgrade. New mask releases have quickly turned things around so, with the original investment case intact and despite the share price increasing 37% since 22 Nov 12, we’re slightly increasing the prices in the recommendation guide by about 10% and increasing the portfolio limit from 3% to 4% in line with the new approach. HOLD.