Date : 25/09/2020

Fisher & Paykel Healthcare Limited

NZE :

FPH

Market Cap : $19.08 Billion

Dividend Per Share : $0.28

Dividend Yield : 0.83 %

Buy

52 Week Range : $16.79 - $37.89

Share Price : $33.75

A company with high growth forecasts given the demand for respiratory products. It comes with good financial health as well. We give a "Buy" recommendation

Company Analysis

 

Fisher & Paykel Healthcare Limited (NZX: FPH) is a New Zealand based firm that manufactures and sells medical respiratory products all over the world. Its products are used in hospitals and homes of patients. Fisher & Paykel is an innovator in the industry as it extensively invests in research & development with the vision of coming out with new and improved products for medical applications that use the latest technology.

63% of FPH’s revenues come from products that are supplied to hospitals, and 36% is drawn from homecare products such as CPAP therapy and home respiratory support products.

The R&D, manufacturing and other support teams are operated out of New Zealand, while a global supply chain helps the firm sell its products globally. The business model of F&P can be seen in the picture below:


Source: Fisher & Paykel

The firm draws most of its revenues from North America, mainly the United States. Europe and Asia weigh in significantly as well. The FY2020, ended March 31st, recorded another good year for the firm as revenues and profits surged.

Due to Covid-19, the need for respiratory equipment that is manufactured by F&P increased, which has led to the performance going up for the firm. The segmented revenues based on geography can be seen in the chart below:

While the operations for production bears the risk of New Zealand, the diversified revenue segment means the firm is exposed to various country risks. But the nature of the business and industry means that F&P’s products are essential to the development of healthcare systems.

Company Updates


Source: Tradingview.com

The stock recovered from the March downturn very quickly as the demand for respiratory products has never been this high. F&P products are in such high demand that it has become an indicator to track the spread of Covid19 globally. F&P’s revenues generated from hospitals increased by 25% in FY2020 due to the impacts of Covid19 to global healthcare systems.

With strong financial results in FY2020, the stock has surged higher and is now trading at $33.75. The stock has not been spared with the market volatility that is present in these uncertain times.

Industry Analysis

The healthcare industry will undergo massive change in the post-pandemic world. Most countries that have shown poor management of the pandemic will be under immense pressure to get their healthcare systems in order to battle the healthcare crisis in the future.

With expected second and third waves of the pandemic, we forecast the demand to stay high and maybe even soar as over the next year.

The medical devices market is expected to grow at 6% year-on-year into a $600 billion global market by 2025. Covid19 has accelerated the growth of this industry and we believe F&P will play a major role in determining market trends.

Investment Thesis

$1.26 Billion of operating revenue was recorded in FY2020. Net profits stood at $287.3m – a 37% growth from FY2019. Since the operations of Fisher & Paykel are based in New Zealand, the manufacturing costs are high. However, the firm still does maintain an EBITDA margin of about 32% over the past 5 years.

The revenue growth this year has doubled compared to the 9%-10% that it was in the past 3 years. This is due to the increased demand we mentioned earlier. However, the extent of the increased demand is still not recorded as the FY2020 report ends on the 31st of March. We forecast the revenues growth to be around 30% in FY2021 as the pandemic has battered and continues to batter most developed nations as well.

The 9% increase in R&D in FY2020 takes it to $118.5m – indicating that the firm will continue to drive revenues through product improvement.

The boost in performance induced by the pandemic has enabled the firm to continue to operate without any significant changes in its capital management. Cash in the bank is $144m. This safeguards the firm from credit default risk in the short-term as cash exceeds the portion of long-term debt that is due and the short-term debt that is present on the balance sheet.

The long-term financial health is a sign of strength as well as total assets exceeding total liabilities by 3.11x. The total debt levels stand at $138m. The capital structure also reassures investors as it is capitalised by 87.5% equity and 12.5% debt.

With good earnings and a healthy balance sheet, Fisher & Paykel has delivered consistent returns on all its assets, capital, and equity. The stable business has grown stronger this year as return on equity has surged due to increased sales and profits.

The firm paid a dividend of 28 cents per share in FY2020. The earnings per share has risen to 50 cents, and the dividend yield currently sits at 0.83%.

Recommendation

Fisher & Paykel is a stable company with a healthy balance sheet. Its revenues and earnings are set to increase as the firm is positioned well to take advantage of the increased demand. We believe this increased demand will sustain for a couple of years as more countries will be better equipping their healthcare facilities to manage any future crisis. We recommend investors to “Buy” as we see bright days ahead for the stock.

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