Sales Boost Peaking For F&P Healthcare?

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

Strong demand for nasal high-flow therapy in hospitals catering to the pandemic provided a strong FY20 result for Fisher & Paykel Healthcare. However, sales acceleration appears to have peaked in the first quarter of FY21.

-Higher hospital sales countered by lower margins
-Boost from pandemic may have peaked
-Stock remains overvalued
 

By Eva Brocklehurst

A surge in device sales for hospitals has lifted Fisher & Paykel Healthcare's ((FPH)) revenue and this continues to accelerate as demand from the COVID-19 pandemic remains heightened across the globe.

Uptake of nasal high-flow (NHF) therapy remains strong and large proportion of current OptiFlow usage is for coronavirus patients in hospitals. Moreover, there has been a material boost to physician awareness.

Management expects this new awareness will support an acceleration in market penetration, with the addressable market now assessed at 50m per annum. Credit Suisse suspects the company's first-mover advantage in hospital has become entrenched.

The company has pointed to strong customer demand for OptiFlow and Airvo because of a number of clinical trial results and the pandemic. Citi believes there remains a long ramp-up period ahead for OptiFlow, and consumables in new applications should continue to grow rapidly for a number of years.

Net profit was NZ$287.3m in FY20, up 30% and reflecting the company's highest growth rate in at least a decade. Hospital revenue grew 24% and homecare revenue rose 9%. The performance of homecare revealed lower diagnostic rates were offset by strong mask re-supply.

Higher hospital sales were countered by lower margins. The company expects gross margins will fall -200 basis points in FY21 because of higher freight transport costs caused by the pandemic. Fisher & Paykel Healthcare is using more airfreight to shift product and raw materials but has decided not to increase prices.

FY21 Outlook

The outlook for FY21 is for net profit of NZ$325-340m. This is based on the assumption hospitalisations from the pandemic peak in the first quarter and activity normalises by the end of the first half.

UBS notes hospital sales have received a boost from the pandemic in the first quarter by around 55%, although current orders suggest this may have peaked. Credit Suisse also understands growth in China has eased back to normal levels.

Similarly homecare growth is expected to normalise in the second half. Credit Suisse points out, while the uplift in mask growth in the second half was pleasing, the benefits from greater patient compliance are difficult to disaggregate from a pulling forward of demand.

Management has acknowledged upside risk to guidance if virus cases continue to rise and Credit Suisse agrees that the ongoing proliferation of cases provides some confidence that the top line momentum can be maintained.

Macquarie suspects new patient referrals for the obstructive sleep apnoea business could be -30-40% lower in the first quarter and suspects homecare revenue will be relatively flat in FY21.

Wilsons points out that the company was turning away prospective new customers to focus on supplying existing accounts during the pandemic. Re-engaging with these prospective customers could offer further opportunities to expand in the US in FY21-22.

Fisher & Paykel Healthcare has indicated that it is been able to manufacture products to satisfy demand although forward orders remain. Nevertheless, UBS continues to believe the extent of pandemic-related sales will eventually disappoint investors.

Overvalued

The share price has risen 52% since mid January and UBS questions the ability to sustain and grow sales at this rate from FY22 onwards. To achieve such a rate would require a step change in high-flow nasal cannula adoption rates and an unchanged dominant market share of around 70%.

While this is not impossible it runs counter to clinical studies and channel checks. While retaining a Sell rating on valuation, UBS acknowledges that positive earnings momentum means a sharp reduction in investor confidence is unlikely. In a similar way, Credit Suisse likes the quality and growth outlook but believes this is priced into the stock.

Citi considers the company has done an "excellent job" in meeting increased demand and anticipates elevated growth rates in FY21, also noting meaningful competition in the high-flow segment of the market is unlikely in the medium term. Still, the broker agrees the stock remains overvalued, conscious there will be a slowdown in FY22 post the pandemic.

The company has broadened its capital management strategy, Macquarie notes, which will result in lower dividends and enable investment in the business to support long-term growth. The company will spend $160m in FY21, doubling manufacturing capacity for both traditional humidifiers and NHF devices.

Emerging markets have also experienced strong demand for devices and these markets are relatively under-penetrated from a product perspective, largely because of lower levels of healthcare infrastructure. Hence, Macquarie suggests this represents a significant opportunity.

The broker retains the one Outperform (Buy) rating on FNArena's database for Fisher & Paykel Healthcare, with the three others having Sell ratings. Wilsons, not one of the seven stockbrokers monitored daily on the database, has placed its valuation and recommendation under review.

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