Australia | May 30 2023
This story features FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: FPH
Following FY23 results for Fisher & Paykel, brokers lower earnings forecasts on a delayed margin recovery and future spending plans.
-FY23 results for Fisher & Paykel proved slightly disappointing
-Rebound in gross margin is delayed
-FY24 revenue guidance increased by 8%
-A heavy investment phase is pending
By Mark Woodruff
New Zealand-based Fisher & Paykel Healthcare ((FPH)) designs, manufactures and markets products and systems for use in acute and chronic respiratory care, surgery and the treatment of obstructive sleep apnea.
The pandemic was a boon for revenue when as much as ten years of product demand was pulled forward, though the gross profit margin has recently been under pressure.
Rising costs for freight and manufacturing, along with input price inflation have impacted margins, despite favourable trends for product prices, product volumes/mix and currency movements.
Last week, as part of its FY23 results presentation, the company forecast a return to a 65% gross margin in three or four years, around a year later than brokers had expected.
While the consensus forecast for the FY24 gross margin was 62.6% prior to the results, first-time management guidance was for around 60.4%.
While Macquarie sees incremental share price upside now that margin recovery expectations have been reset across the market, most brokers have lowered earnings forecasts.
Jarden is one of those brokers, yet notes the company generated solid second half revenue momentum as market conditions look to be tracking back towards a more normal state for both the Hospital and Homecare businesses.
Group revenue for FY23 fell by -6% to NZ$1.58bn, in line with the consensus forecast.
Ord Minnett increased its revenue forecasts by an average of 4% largely due to a faster-than-expected normalisation of flu hospitalisations and more patients requiring respiratory support.
Homecare outperformed with second half obstructive sleep apnea (OSA) mask growth rising by 24% in constant currency terms, while further scope for market share gains may be in prospect, with management hinting at new mask products in FY24.
As was shown by ResMed's ((RMD)) recent results, OSA mask sales benefited from competitor Philips’ device recall, points out Wilsons.
Fisher & Paykel also expects ongoing growth for its Evora full-face mask in FY24, which underpinned second half mask growth, according to Jarden, following introduction to the US market in May 2022.
There are also good signs of clinical adoption in the company’s nasal high flow (NHF) business, according to Macquarie. New Applications consumables in FY23 as a percentage of Hospital revenue returned to a record 72%, amid destocking pressures.
Second half growth for New Applications is evidence of steady progress and increasing use of NHF therapy, suggests Jarden. Anaesthesia is also thought to be scaling well at just over 5% of New Applications revenue, supported by investment in a dedicated global sales force.
More negatively, an increased magnitude of capital spend for FY24 surprised Jarden, especially as higher capex looks set to remain a feature through to FY27.
Additionally, FY24 operating expense growth guidance of 12% surprised Morgan Stanley on the upside, pushing out the broker's 30% forecast for long-term earnings (EBIT) margin to FY27/28.
Owing to this opex hike and an elevated interest expense associated with a material capex expansion, Wilsons cuts its profit estimates by -10-14% across the forecast period.
FY24 revenue guidance is for an 8% increase on the previous corresponding period to NZ$1.7bn, with normalising Hospital Hardware sales offset by solid growth in New Applications consumables and ongoing growth in Homecare.
Wilsons notes this guidance is in line with the consensus forecast, though the mere provision of renewed guidance should be construed positively.
In NZ dollar currency, a 23c dividend was declared, fully imputed for tax residents, while an additional 4c dividend applies for non-residents.
Ord Minnett forecasts a consistent 70% dividend payout over its five-year forecast period, given the company’s still relatively modest capital requirements.
Medium to longer-term outlook
A positive medium-term Hospital division outlook and the resetting of the gross margin outlook has prompted Macquarie to upgrade its rating to Outperform from Neutral.
Ord Minnett (Lighten) also forecasts strong EPS growth driven by double-digit sales growth and margin expansion from scale efficiencies, as well as an increasing contribution from higher-margin consumables.
This analyst believes the last decade of margin expansion is largely over and forecasts midcycle margins will hold roughly in line with pre-pandemic levels.
Nonetheless, Fisher & Paykel is still a high-quality business, according to Neutral-rated Citi, with large underpenetrated markets, limited competition and high margins that should deliver sustainable double-digit earnings growth throughout economic cycles.
Following FY23 results, a fall in average target price to $21.46 in the FNArena database is solely due to Morgan Stanley reducing its target to $22.43 from $25.20, while Ord Minnett maintains its $20.50.
The remaining target prices for Macquarie and Citi are set in New Zealand currency and not taken up in the overall average. The average target for these two brokers falls to NZ$27.30 from NZ$28.29.
Shares for the dual-listed company are currently trading around $22.60 on the ASX.
Due to broker concerns over margins and spending plans there is only one Outperform rating, two Neutral (or equivalent) ratings and one Lighten recommendation in the daily-updated database.
Outside this coverage, Wilsons (Market Weight) has lowered its target to $23.39 from $24.07.
Jarden also decreased its target to NZ$24.50 from NZ$25.50 and lowered its rating to Neutral from Overweight, due to reduced valuation support and the upcoming heavy investment phase.
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