Date : 19/11/2020

Fisher & Paykel Healthcare Limited

NZE :

FPH

Market Cap : $19.71 Billion

Buy

52 Week Range : $20.29 - $37.89

Share Price : $33.44

A very good stock with strong management to guide the firm into a future with tailwinds present in the industry. A "Buy" from us

Company Analysis

 

Fisher & Paykel Healthcare Limited (NZX: FPH) is a global leader in medical respiratory products. Their products can be found in over 120 countries. We first covered the stock on the 25th of September at a price of $33.75 a share. Since then, the stock rallied by 12.5% until early November. However, when the news of a vaccine broke, markets looked to have priced FPH by slashing some of the expectations in revenues by virtue of a decrease in demand for its medical respiratory equipment. Investors sold the stock and it now trades at $33.44 – 0.9% off our initial recommendation to buy.


Source: Tradingview.com

The positivity surrounding a vaccine looks to be overstated by the market. Our valuations considering a slight fall in demand for their products is still higher than what the markets are currently pricing FPH at. The diversification of FPH’s business is what strengthens our guidance for the firm’s revenues. North America and Europe are still feeling the pain the pandemic has induced on them. Australia and NZ have relatively managed the pandemic very well so far and the light at the end of the tunnel is visible – especially with the potential of a new vaccine.

Experts suggest that if Pfizer’s vaccine ticks all the boxes and is approved at the earliest, it will still take about 5 to 6 months for the vaccine to rollout. While Europe is experiencing a second wave, America’s management of the virus shows that they are yet to stop the first wave efficiently. Thus, the short-term outlook for FPH’s respiratory products is still strong.

FY2021 onwards, we are going to see a lot of spending and budget allocations towards healthcare in all major developed markets. The world’s healthcare systems have been put to test by Covid-19 and it is quite safe to say that most developed nation’s healthcare systems were not prepared to deal with a pandemic of this magnitude. Hence, we expect this to be a very big talking point as far as politics and economic policies go. FPH and other healthcare firms will thus benefit in the medium to long-term.

Products

63% of FPH’s revenues come from products that are supplied to hospitals, and 36% is drawn from homecare products. Hospital products include respiratory products such as non-invasive ventilators, masks, etc. While homecare products are CPAP therapy, sleep apnea masks, software, and data management system for monitoring, home respiratory support products, etc.

Revenues from both its product segments have increased over the past 5 years. Hospital segment has been growing faster than homecare. The growth in demand for hospital products and homecare products because of the pandemic can be seen in the above table. Hospital operating revenues have grown by over 24% and homecare by over 8% as of March 2020.

The chart below shows the revenue segmentation by product.

The brunt of the crisis was felt prior to March and we estimate the revenue growth rate for FY2021 to be in the 40% range. The costs during the year have slightly increased due to the disruptions in supply chain and higher freight costs, and the firm has not passed the cost on to its customers. This, however, does not affect the general outlook for the year given the boost in revenues.

Outlook

Fisher & Paykel is an exceptionally well-run business with a very strong and experienced board and management. FPH’s strategy to invest for long-term growth has turned out to be very sustainable for the firm and for shareholders. The stock has returned 322% over the last 5 years and 167% over the past 3 years. With continued investment in R&D (with the most recent being 9%), and the importance of healthcare systems, we expect FPH to continue to innovate and deliver products to both – hospitals and homecare. FPH is also expected to increase its dividends in the coming years while striving to maintain its target gearing ratio of -5% to 5%. In FY2020, the firm increased dividends by 18%. The total dividends paid out during the year has been 27.5 cents per share.

Covid-19 has added tailwinds to FPH’s business – both in the short-term and long-term. The substantial increase in demand will not sustain once we emerge out of the crisis. However, we do expect the firm to perform much better than what the market currently expects it to as government spending and policies add tailwinds.


Source: Fisher & Paykel

Since the firm earns most of its revenues from the USA and Europe, foreign exchange rates affect the extent of its recognised revenues. FPH has hedged 85% of its expected exposure to USD and the Euro for the FY2021.
Manufacturing capacity has been increased and new product tooling has been brought forward during the year. This is expected to increase capital expenditure to $160 million for FY2021.

The global sleep apnea devices market is a fairly large one. Current estimates put a valuation of about US$4.5 billion. The industry is forecasted to grow at a rather high CAGR of 10% into a US$7.5 billion market size by 2024. The large growth here is derived from the assumption that more individuals will be diagnosed (as most suffers from sleep apnea are not diagnosed and probably do not know that they are suffering) as consumer behaviour changes look to favour health & wellbeing. FPH along with a couple of other big players are expected to benefit from the market for sleep apnea.

In our initial report on Fisher & Paykel Healthcare, we have gone over the financial performance and financial health of the firm in detail. No new financial reporting has been done by the firm since then and the analysis still holds good. Investors looking to make an investment decision on FPH can click here to view the report. The stock is dual listed – both in the ASX and NZX. All the figures used here are New Zealand Dollar, the firm’s reporting currency.

Recommendation

Fisher & Paykel Healthcare is a stock that has benefitted long-term shareholders since the past few years. They have always found a way to perform better than the market and deliver above average returns. Their business model has a lot of tailwinds in the new look post pandemic world we are approaching. Covid19 was a hiccup that nobody planned for and FPH has benefitted in the short term due to an increase in demand. However, the long-term strategy for the firm remains unchanged and FPH is still going strong. The firm is also expected to increase its dividend payouts as we move forward. We continue to recommend members to “Buy” for the long-term.

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