F&P Healthcare: Result 2016

This maker of ventilation masks has produced another impressive result, but the share price leaves little room for error.

Fisher & Paykel Healthcare has reported a strong result driven by growing use of its products outside of intensive care, such as oxygen and humidity therapy, and the ability of the company’s Optiflow system to reduce the need for invasive therapies. Revenue rose 21% to NZ$816m for the year to 31 March compared to the prior comparable period.

Key Points

  • Great result with expanding margin

  • Increased R&D spend

  • Premium to ResMed too high; Sell

The company’s Respiratory and Acute Care (RAC) division – which sells breathing devices for use in hospitals – increased sales by 15% excluding the effects of currency fluctuations, whereas the Obstructive Sleep Apnea (OSA) division grew sales 21% in constant currency terms, thanks to increasing demand for the company's new range of masks, including the Eson and full-face Simplus. F&P Healthcare also noted growing demand for its myAIRVO humidifier from home healthcare providers.

Net profit was up 27% to NZ$143m, beating management’s prior estimate for NZ$135m–140m. Various cost-cutting initiatives – such as moving a portion of manufacturing to a new facility in Mexico – and the sale of more high-margin products expanded the gross margin by 2.8 percentage points to 64.0%.

Hedging loss

We were impressed by the result, particularly as it wasn’t helped by gains on derivative contracts used to manage currency fluctuations. Last year hedging gains added NZ$28m to operating revenue, and they added NZ $55m in 2014, having been made at higher exchange rates. However, as these valuable old contracts expired, F&P Healthcare was forced to replace them with new contracts at lower exchange rates, leading to this year’s small loss of NZ$3m.

Table 1: FPH result
Year to March 2016 2015 /–
Revenue (NZ$m) 816 672 21
EBIT (NZ$m) 211 170 24
NPAT (NZ$m) 143 113 27
EPS (NZ cents) 25.1 19.9 25
Final dividend   10 NZ cents (up 25%), unfranked, ex date 15 June

F&P Healthcare continued to pay down debt to improve its balance sheet. Net debt currently stands at NZ$44m, down from NZ$134m in 2013. The company also increased spending on research and development (R&D) by 13%, and management said several new masks, flow generators and monitors are expected to be released in the coming year.

Management expects constant currency revenue to increase 10% to NZ$900m in 2017, and net profit of NZ$165m–170m, up around 17%, putting the stock on a forward price-earnings ratio of 35.   

That’s expensive even for a high-quality company, and especially so relative to industry heavyweight ResMed, which has a forward price-earnings ratio of 24. While the current growth rate is impressive, today’s share price leaves little room for error, and we don’t think F&P Healthcare is worth such a significant premium to ResMed.

We’re increasing F&P Healthcare’s price guide to reflect the growing company but we continue to see better opportunities on our Buy list. We’re sticking with SELL.

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