Fisher & Paykel Healthcare Corporation Limited

FPH Details

About the Company

Fisher & Paykel Healthcare Corporation Limited (NZX: FPH) is a primary marketer, manufacturer and designer of products and systems for usage in surgery, acute care, respiratory care, and the treatment of obstructive sleep apnea. The company has a market capitalisation of ~$18.959 billion on 23^rd November 2020.

For the 12 months ended 31^st March 2020, the company reported operating revenue of $1.26 billion, up by 18 per cent Y-o-Y, or 14 per cent Y-o-Y in constant currency. NPAT stood at $287.3 million, up 37 per cent Y-o-Y, or 30 per cent Y-o-Y in constant currency.

During the year, the company’s gross margin decreased by 73 bps and stood at 66.1%. However, in constant currency, there was a decrease of 150 bps. The decline was mainly because of an increase in freight cost due to COVID-19 as well as first full-year of costs of the second Mexico manufacturing facility. Operating expenses increased by 7% Y-o-Y to $456.5 million. Excluding ResMed patent litigation expenses in the previous year of $23.4 million, operating expenses grew by 13% Y-o-Y, which implies ongoing expenditure to support global sales growth.

The company has also expanded its previous dividend policy into a broader capital management policy. It has maintained a target debt-to-debt-plus equity ratio in the range of +5 per cent to -5 per cent, and the company anticipates raising dividends as earnings grow, while considering the target gearing ratio.

The company has also decided to pay a final dividend of 15.5 cps, an increase of 15 per cent as compared to the final dividend last year. This brings the total dividend for the year to 27.5 cps, an increase of 18 per cent on last year.

Exhibit 1: Income Statement

 Source: Company Reports

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Fisher & Paykel Healthcare Corporation Limited. The Vanguard Group, Inc. is the largest shareholder in the company, with a percentage holding of 5.23%.

Exhibit 2: Top 10 Shareholders

 Source: Refinitiv (Thomson Reuters)

Key Ratios

During FY20, EBITDA margin of the company witnessed an improvement over the previous year and stood at 34.8%, up from 33.4% in FY19. Over the span of FY16 to FY20, the company has improved its net margin from 17.6% to 22.7%. Improvement in the net margin indicates that the company is well managing its costs and can convert its revenue into profits.

Exhibit 3: Key Ratios

Source: Refinitiv (Thomson Reuters)

Segmental Performance

Hospital product group: The hospital product group registered operating revenue of $801.3 million, up by 25% Y-o-Y. The company stated that sales from new applications consumables, that includes products utilised for nasal high flow therapy, increased by 23 percent in constant currency over the prior financial year.

Homecare product group: The Homecare product group registered revenue of $457 million, up by 9 per cent Y-o-Y. The solid growth in the segment was driven by the expansion of F&P Vitera™ full-face mask into the U.S. In February, the company launched F&P Evora, a new compact nasal mask for treating OSA.

Exhibit 4: Segmental Revenue

Source: Company Reports

New Manufacturing Capacity in Mexico

The company has started planning for the third manufacturing facility in Mexico, which is to be commissioned within the next two years. The company is continuing to grow manufacturing capacity to make sure that respiratory products are available if required. The company finished the second Mexico facility in January 2019 and the fourth New Zealand facility, the Daniell Building, in May 2020. Together with the planned New Mexico building, these three buildings add an additional 17,000 m² of cleanroom manufacturing space, to a base of 28,400 m² available prior to their construction.

Impact of Foreign Currency on Bottom Line

The company is exposed to movements in foreign exchange rates, with roughly 99% of operating revenue generated in currencies other than New Zealand dollars. About 55% of COGS and 57% of operating expenses are in currencies other than NZD. PAT benefited by $17.4 million as compared to the previous year due to movements in foreign currency.

Exhibit 5: Impact of Foreign Currency On Operating Revenue

 Source: Company Reports

Financial Position of the Company

In FY20, property, plant and equipment purchases stood at $145.3 million, reflecting a rise from $115.4 million in FY19. This expenditure was mainly associated with building projects in New Zealand, totalling $81.8 million with the rest of the expenditure being production tooling and equipment costs and fitting out the new buildings in Mexico and New Zealand. The company had net cash of $42.2 million and gearing of -4.3%. The company stated that gearing was within the target range of -5% to +5%.

Exhibit 6: Funding and Short-Term Investment

Source: Company Reports

Outlook

In the release dated June 29, 2020, the company stated that it anticipates full-year operating revenue for the 2021 financial year of ~$1.48 billion and NPAT of ~$325 million to $340 million. However, on August 18, 2020, the company updated its guidance. The company expects full-year operating revenue for the 2021 financial year to be ~$1.61 billion and NPAT to be ~$365 million to $385 million.

The company is expected to release its 1HFY21 results for the period ending September 30, 2020 on November 25, 2020. Although, trading update provided for the first four months of FY21 is quite encouraging, there could be risks related uncertainty around COVID-19, and its potential impact, effectiveness and adoption of treatment measures, and the announcement of results in line with the guidance provided. 

Trading Update:

For the four months ended July 2020, the company witnessed strong demand for Hospital respiratory care products. Hospital hardware sales witnessed an increase over first 4 months of FY 2021 with 390% constant currency revenue growth to the end of July on the YoY basis. In constant currency terms, Hospital consumables revenue witnessed a growth of 48% Y-o-Y, and overall Hospital product group revenue grew by 91% Y-o-Y. Notably, the company stated that growth in home respiratory support is more than offsetting a fall in the OSA flow generators, that led to Homecare revenue growth of 5% to the end of July YoY, in constant currency terms.

Exhibit 7: FY 2021 Trading Update

Source: Company Reports

Exhibit 8: Key Valuation Metrics

Source: Refinitiv (Thomson Reuters)

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

EV/Sales Based Valuation (Source: Refinitiv (Thomson Reuters))

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

The top line of the company has registered a CAGR of 11.57% during the period of FY16 to FY20. In FY20, the company’s net margins stood at 22.7%, which is above the industry median of 9.8%. Its ROE also stood at 30.5% in FY20, which is above the industry median of 12.0%.

Considering the aforesaid facts, decent fundamentals, positive outlook and current trading levels, we have valued the stock using a relative valuation method (on an illustrative basis), i.e., EV/Sales based approach, and arrived at a target price of low double-digit growth (in % terms).

On the back of above facts and expected upside, we have a “Buy” recommendation on the stock at the current market price of NZ$32.900 per share, up by 0.73% on November 23, 2020.

FPH Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

Disclaimer

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