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F&P Healthcare Needs To Lift Mask Growth

Australia | May 28 2019

Fisher & Paykel Healthcare requires a significant improvement in its OSA mask performance as well as high growth rates in new hospital applications to meet targets, brokers assess.

-Revenue affected by failure to launch new mask range in expected timeframe
-Expected to continue losing market share in masks
-Stock considered expensive relative to peers


By Eva Brocklehurst

Fisher & Paykel Healthcare ((FPH)) has continued its long-term trend of strong growth in hospital care, up 20% in FY19 for new applications such as Optiflow, and low growth in home care, amid negative growth in mask sales in the second half.

Yet guidance for FY20 has prompted downgrades from brokers, as slowing revenue growth is envisaged. Revenue of NZ$1.07bn met guidance, as did net profit, but the outlook for market share in masks worries brokers.

Fisher & Paykel Healthcare has noted consumables make up 86% of revenue now. Hospital revenue grew 11% over the year while, in home care, flow generators grew 30%. Geographically growth was slower in North America and Europe while Asia-Pacific accelerated.

Yet, OSA (obstructive sleep apnoea) mask growth was in negative territory in the second half for the the first time in seven years, amid strong competition. The company has guided for a net profit range of NZ$240-250m in FY20, below estimates.

A significant improvement in OSA mask performance and the maintenance of high growth rates in new hospital applications are both required to meet the company's target of doubling revenue every five years. UBS believes this is unlikely over the next three years.

In the long-term the myAirvo product for home treatment of COPD (chronic obstructive pulmonary disease) remains critical, but the broker points out supportive US clinical results and reimbursement are probably more than three years away.

Taking into account lower spending on litigation, an FX and R&D tax benefit and declines in gross margins, Citi calculates organic net profit slowed by -2%. As opposed to the prior guidance of 9-10% management has instead indicated R&D expenditure is likely to grow in line with expected constant currency revenue growth. Macquarie calculates this equates to expenditure at the top end of the previously stated range.

New Mask Launch

Earnings were affected by the company failing to launch its new mask range in the expected timeframe. Citi points out the company enjoyed several years where, as new masks were introduced, its position as number three in the market was consolidated. This came to an end in the first half of FY18 and ResMed ((RMD)) is likely to continue taking share into FY20.

Citi considers the stock overvalued and expects the company will continue to lose market share in OSA masks, at least until the Viterra mask is approved in the US. The company plans to launch another new mask in FY20. The broker's estimates are at the top end of guidance for net profit, given this could prove to be conservative in light of strong underlying hospitals growth.

On the positive side, UBS expects mask growth should pick up in the second half of FY20 once the new full face Viterra mask is released in the US. However, costs from the second Mexico site mean gross margins drop by -50 basis points in FY20 while costs of a new Auckland facility are likely to keep gross margin steady in FY21.

Continued decline in OSA masks is the main risk over the next year and Macquarie asserts the jury is out on whether the new mask will actually stem the loss of market share. The broker agrees the contraction in gross margin is of concern, as management has noted the both OSA mask growth and GP margin expansion out of the Mexican facilities go hand-in-hand.

Credit Suisse is also uncertain until US authorities clear the way for Viterra, which leaves the company exposed to worsening outcomes in the next six months. The broker has no doubt that the company is a high-quality business and there is impressive growth in key areas. However, the large multiples that were justified where there was broad-based growth and margin expansion are now less fitting.


The stock may be off recent highs but it still trades on a one-year forward PE of 37x, well above global medical device peers, UBS points out. Macquarie agrees, relative to ResMed, the stock is expensive, considering respective operating earnings (EBITDA) growth forecasts.

Wilsons is more positive, although does not deny the stock is expensive, believing the premium can be maintained in the near term. Downside to current levels is considered unlikely, given the new product cycle in the sleep division and barring unforeseen events. However, the broker acknowledges investors could take advantage of the exaggerated valuation and trim their weightings.

FNArena's database shows four Sell ratings for Fisher & Paykel Healthcare. Wilsons, not one of the eight stockbrokers monitored daily on the FNArena database, maintains a Hold rating and NZ$14 target.

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