Fisher & Paykel Healthcare Plays Safe After Record Year

This story features FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: FPH

-Substantial growth in respiratory care
-Track record of earnings upgrades
-Tussle for market share with ResMed
 

By Eva Brocklehurst

New Zealand-based Fisher & Paykel Healthcare ((FPH)) is riding high. The company produced a record profit in FY14, up 26%, with new applications such as oxygen therapy ramping up and OSA (obstructive sleep apnea) masks gaining market share.

FPH has two divisions. Respiratory and Acute Care (RAC) includes intensive care ventilation, oxygen therapy and humidity therapy. This division generated constant currency growth of 14% and at the end of FY14 new applications comprised 41% of RAC consumables revenue. The other division is OSA, which includes nasal and full face mask and flow generator ranges, with 15% constant currency growth in FY14. On FNArena's database there are two Buy ratings, one Hold and one Sell.

The company is being conservative with guidance as FY15 profit is expected to be similar to FY14, dented by the strength of the New Zealand dollar as currency hedges roll off. A more onerous currency forecast means UBS has lowered earnings forecasts for FY15 and FY16 by 1% and 3% respectively. UBS believes there is still strong potential for growth in OSA masks and new RAC applications. Productivity improvements are also expected to continue for some time. The broker retains a Neutral rating and prefers ResMed ((RMD)) in the sector, on valuation grounds. The FPH price target is NZ$4.20.

OSA revenue growth not only impressed Credit Suisse in absolute constant currency terms but also in relative terms, with growth at least three times that of the estimated sector growth of 5%. The broker thinks the company is being overly conservative and thinks any surprise will come on the upside, given the recent track record of earnings upgrades. The broker notes from the company's commentary that the ageing demographic and increased access to healthcare in developing countries is underwriting significant growth in patients who will benefit from FPH products. Credit Suisse believes the company might be affected in the short term by currency volatility but further afield the growth story is still very much intact and an Outperform rating is retained.

Goldman Sachs adds FPH to its Australasian Conviction Buy list, believing the investment story is in good shape with the new products and benefits from manufacturing in Mexico. The broker thinks FPH is well positioned to benefit from the NZ dollar easing back from near record levels. The broker's 12-month price target of NZ$5.05 is based on a FY16 price/earnings multiple of 22 times and supported by a robust return on equity of 23%. To Goldman this implies a total shareholder return of 22% and a cash dividend yield around 3%.

Macquarie observes FPH's results are usually well signalled as the company provides regular updates. The company will have to deal with the fall in hedging gains in 2015 and valuation is very sensitive to currency assumptions, so the broker's price target is calculated using a combination of three currency forecasts. The broker's target is NZ$4.40 and Macquarie retains an Outperform rating.

Citi reduces its target to NZ$2.98 from NZ$3.02 and retains a Sell rating. The FY14 results were in line with the broker's expectations and Citi estimates FPH has made inroads into ResMed's market share over the past 12 months. The issue is whether ResMed's new mask products gain traction over the next 12 months, and whether this is sufficient to take back market share. Citi assumes ResMed will recover the lost market share and expects FPH's "mid teens" growth guidance in OSA will be difficult to achieve in the second half of FY15.

FPH appears to be holding market share in flow generators with 4-5% growth. ResMed and Respironics have stronger offers and more entrenched customer relationships in this area and the broker questions whether FPH can sustain its market position in flow generators. Citi thinks FPH is somewhat expensive and also prefers ResMed, which is significantly cheaper and offers higher earnings growth potential over FY15 and FY16.

In terms of RAC, Citi likes the high proportion of consumables sales that underpins the division and the annuity style of much of the revenue. In the medium term the broker foresees greater competition, particularly in the US market, where competition was almost non existent. In this region, the broker notes ResMed's purchase of Grundler goes head-to-head with FPH in humidification. On the positive side, any loss of market share for FPH is likely to be slow in Citi's opinion, because of how well entrenched the company is among US respiratory therapists.
 

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