Company Reports

We maintain our NZD 23.50 fair value estimate for narrow-moat Fisher & Paykel Healthcare, or AUD 22.00 at current exchange rates, following the firm initiating a voluntary limited recall of Airvo 2 and myAirvo 2 devices manufactured before Aug. 14. 2017. Luckily, these devices were sold well before elevated covid demand, and as such Fisher estimates there are only around 9,000 affected devices remaining in use. The company launched Airvo 3 in May 2022. This compares with Philips’ recall of 5.6 million devices. The company estimates NZD 12 million in one-off costs associated with the recall that will be provisioned for in fiscal 2024. This does not impact our investment thesis, and we leave our long-term estimates broadly unchanged.

Fisher & Paykel is well positioned to benefit from long-term growth prospects in hospital and home respiratory care. Increasing adoption of nasal high flow, or NHF, therapy in the hospital division is priority, followed by targeting treatment of COPD in the homecare segment, and longer term, surgical technologies. What management terms “new applications” consists of non-invasive ventilation, NHF therapy, and surgical humidification. Of these, we see the NHF devices and consumables, which are marketed under the Airvo/Optiflow label, as having the most potential reach. The benefits of NHF therapy delivered via nasal prongs include better clinical outcomes leading to a shorter length of hospital stay and lower overall treatment cost.

We raise our fair value estimate for narrow-moat Fisher & Paykel Healthcare by 4% to NZD 23.50, or AUD 22.00 at current exchange rates, largely due to the time value of money and strong performances in consumable sales. Management upgraded fiscal 2024 revenue guidance by 2% to NZD 1.73 billion, and fiscal 2024 underlying net profit after tax guidance range by 3% at the midpoint to NZD 260 million-NZD 265 million. The upgrade was largely due to strong demand for hospital consumables and its Evora full mask, which launched in May 2022. The firm also said there will likely be a write-down on its land in Karaka, Auckland, which will be confirmed at the full-year result in May 2024.

Fisher & Paykel is well positioned to benefit from long-term growth prospects in hospital and home respiratory care. Increasing adoption of nasal high flow, or NHF, therapy in the hospital division is priority, followed by targeting treatment of COPD in the homecare segment, and longer term, surgical technologies. What management terms “new applications” consists of non-invasive ventilation, NHF therapy, and surgical humidification. Of these, we see the NHF devices and consumables, which are marketed under the Airvo/Optiflow label, as having the most potential reach. The benefits of NHF therapy delivered via nasal prongs include better clinical outcomes leading to a shorter length of hospital stay and lower overall treatment cost.

We raise our fair value estimate for narrow-moat Fisher & Paykel by 2% to NZD 22.50, or AUD 21.00 at current exchange rates, largely due to the time value of money. First-half revenue grew 16% to NZD 804 million and net profit after tax grew 22% to NZD 107 million, both slightly ahead of prior guidance. Management reiterated its fiscal 2024 revenue guidance of roughly NZD 1.7 billion but also provided fiscal 2024 NPAT guidance of NZD 250 million-NZD 260 million. The guidance implies a stronger second half reflective of typical seasonality given the North American flu season.

Fisher & Paykel is well positioned to benefit from long-term growth prospects in hospital and home respiratory care. Increasing adoption of nasal high flow, or NHF, therapy in the hospital division is priority, followed by targeting treatment of COPD in the homecare segment, and longer term, surgical technologies. What management terms “new applications” consists of non-invasive ventilation, NHF therapy, and surgical humidification. Of these, we see the NHF devices and consumables, which are marketed under the Airvo/Optiflow label, as having the most potential reach. The benefits of NHF therapy delivered via nasal prongs include better clinical outcomes leading to a shorter length of hospital stay and lower overall treatment cost.

We maintain our NZD 22 fair value estimate, or AUD 20.50, and earnings estimates for narrow-moat Fisher & Paykel following a brief market update. Fisher reiterated its fiscal 2024 revenue guidance of NZD 1.7 billion and provided first-half fiscal 2024 guidance of NZD 790 million in group revenue and NZD 95 million to NZD 105 million in net profit after tax. First-half revenue guidance implies 14% growth on the previous corresponding period and a stronger second half. This is in line with typical seasonality given the North American flu season. We leave our fiscal 2024 forecasts of NZD 1.68 billion in group revenue and EBIT of NZD 335 million unchanged.

A global surge in coronavirus patients requiring hospitalisation for respiratory treatment continued to drive sales in narrow-moat Fisher & Paykel Healthcare’s hospital hardware and consumables in third-quarter fiscal 2021. Fisher now expects to better its fiscal 2021 guidance of NZD 1.72 billion revenue NPAT of NZD 400 million-415 million it provided in November 2020. While the original guidance implied weaker second-half earnings and demand to begin normalising, sales have accelerated. Constant currency group revenue for the first nine months of fiscal 2021 has risen 73% on the previous corresponding period, compared with 61% growth in the first half. Largely driven by the top-line near term, we increase our fair value estimate by 5% to NZD 23.00 and update the Australian dollar equivalent to AUD 21.40 to reflect the latest NZD/AUD exchange rate of 1.08 from 1.05 prior. Our forecast fiscal 2021 revenue and NPAT increase by 24% to NZD 2.14 billion and NZD 516 million, respectively, as we think hospitalisation rates will remain elevated until the end of fiscal 2021.

Fisher & Paykel is well-positioned to benefit from the long-term growth prospects in hospital and home respiratory care. Widespread adoption of what management terms “new applications” in the respiratory care sector is key, and consists of non-invasive ventilation, nasal high-flow therapy and surgical humidification. We see the high-flow devices and consumables, which are marketed under the Optiflow label, as having the most potential reach, as growing clinical evidence is promoting use of this therapy outside of ICU settings in hospital and home environments. The benefits of high-flow oxygen therapy delivered via nasal prongs include better clinical outcomes leading to a shorter length of stay and lower overall treatment cost.

Fisher & Paykel is well positioned to benefit from the long-term growth prospects in both hospital and home respiratory care. Widespread adoption of what management terms “new applications” in the respiratory care sector is key, and consists of non-invasive ventilation, nasal high flow therapy and surgical humidification. We see the high flow devices and consumables, which are marketed under the Optiflow label, as having the most potential reach, as growing clinical evidence is promoting use of this therapy outside of ICU settings in hospital and home environments. The benefits of high flow oxygen therapy delivered via nasal prongs include better clinical outcomes leading to a shorter length of stay and lower overall treatment cost.

Fisher & Paykel Healthcare has been a beneficiary of the coronavirus pandemic with increased demand for hospital hardware items driving two recent profit upgrades. We increase our near-term outlook for fiscal 2021, however, we don’t expect the longer-term benefit of higher consumable sales to support the larger installed hardware base to be significant. Consumables usage, which contributes between 85% and 90% of hospital revenue, is driven by patient turnover within hospitals which we would expect to normalise post-pandemic. We increase our fair value estimate to NZD 19.00 (AUD 17.90) from NZD 17.90 (AUD 17.00), but shares screen as overvalued.

Fisher & Paykel is a business of two halves--the narrow-moat-rated hospital business that is growing strongly and contributed 62% of revenue in the half year, and the no-moat-rated homecare segment that is shrinking. We expect this relative performance dynamic to continue in the medium term with the hospital division to make up 72% of revenue by fiscal 2024. Adoption of the company’s “new applications,” primarily the Optiflow nasal high flow device and associated myAIRVO humidifier, as a new clinical standard both inside and outside hospital ICU settings is gaining traction. With current penetration levels estimated by Fisher & Paykel at only 20% to 30%, the runway for growth is long and our forecasts include this subsegment growing at 20.3% compounded to fiscal 2024. The company says initial studies supporting its use in the homecare environment have started, which augurs well for the long run growth in the homecare division, however, it typically takes at least a decade for a new clinical standard to be adopted. Consequently, we expect subdued performance from this division in the next five years.

Narrow-moat Fisher & Paykel upgraded its revenue guidance for fiscal 2020 by 2% to NZD 1.19 billion and profit after tax by 4% to a range of NZD 255 million to NZD 265 million. This is the second guidance upgrade in two months. Currency movements contributed half of the revenue upgrade, as the firm benefits from the weakening New Zealand dollar given Fisher & Paykel has substantial exposure to the U.S. market, earning just short of 50% of its revenue there. The balance stems from better than expected volumes in the homecare division following the successful launch of a new face mask. Based on the volume uplift, we increase our sales estimate and gross margins for this division and match our currency estimates to spot exchange rates to align with the updated management guidance. However, this increased guidance has little impact on our long-term forecasts, and as a result, we increase our fair value estimate to NZD 17.30 from NZD 16.90 and AUD 16.10 from AUD 16.00. The stock screens as fairly valued at current levels.

Our investment thesis for narrow-moat Fisher & Paykel hinges on increased uptake of “new application” respiratory devices in hospitals and the upgrade in management guidance for fiscal 2020 confirms our long run outlook. “New applications” consists of noninvasive ventilation, high flow nasal delivery of gases and surgical humidification. The updated guidance cited an acceleration in the “new applications” growth from a base rate of 20% in fiscal 2019 and we upgrade our fiscal 2020 revenue growth assumption for this subsegment to 28% from 20%. As a result, we increase our fair value estimate to NZD 16.90 from NZD 16.40, and to AUD 16.00 from AUD 15.60. In addition, we upgrade our stewardship rating to Exemplary from Standard as the company continues to generate returns far in excess of the cost of capital.

Despite many Australian-listed healthcare stocks we cover having substantial revenue exposure to the U.S., the latest potential regulatory changes in that market pose a low risk to our fair value estimates. The cost of and access to healthcare is an emotive topic among U.S. voters and hence at the forefront of political agendas. Of relevance to the Australian companies that operate in the U.S. is the draft Lower Health Care Costs Act, or LHCCA, which aims to improve transparency in the healthcare sector and reduce prescription drug pricing, as well as President Donald Trump’s recent executive order on transparency and comments on capping drug prices to the lowest developed-country level.

The transition of coverage to a new analyst and reduction in cost of equity following a review of narrow-moat Fisher & Paykel’s systemic risk exposure has us raising our fair value estimate to NZD 16.40 from NZD 11.00, despite weaker than expected growth reported and a subdued outlook in the homecare division. Based on an AUD/NZD exchange rate of 1.05, our fair value estimate is revised to AUD 15.60 up from AUD 10.70.

We make no changes to our NZD 11.00 per share fair value estimate for narrow-moat-rated Fisher & Paykel Healthcare, and continue to rate the firm as overvalued. Our fiscal 2019 net profit after tax forecast of NZD 210 million stands and is at the top end of management's NZD 205-210 million guidance. However, we increase our fair value estimate for the Australian CDIs to AUD 10.70, due solely to the appreciation of the New Zealand dollar against the Australian dollar with the exchange rate currently at 1.03.

We continue to expect significant growth in Fisher & Paykel's key hospital segment, which enjoys switching costs underpinning the firm's narrow moat rating. However, given softer legacy product sales in first-half fiscal 2019, we have lowered our full-year net profit after tax, or NPAT, forecast to NZD 210 million from NZD 214 million. Last trading at around NZD 13.00, shares in Fisher and Paykel Healthcare trade at a premium to our unchanged NZD 11.00 fair value estimate. Despite increasing first-half fiscal 2019 NPAT 20% versus the previous corresponding period, or pcp, beating guidance of NZD 95 million, Fisher & Paykel Healthcare retained full year profit guidance of NZD 205 to 210 million, tracking our updated projection.

We maintain our NZD 11.00 and AUD 10.00 fair value estimates for narrow-moat-rated Fisher & Paykel Healthcare following the transfer of coverage to a new analyst. We are now more positive on near-term margins, and have lifted our 2019 net profit after tax forecast by 4% to NZD 214 million, slightly above management's updated guidance of NZD 205-210 million. Offsetting this is our increase 2019 capital expenditure forecast, to NZD 165 million, to more appropriately represent investment in new facilities in New Zealand and Mexico. Last trading at NZD 14.08, shares in Fisher & Paykel appear overvalued.

We still see the risk-reward proposition as skewed to the downside for Fisher & Paykel, with shares trading at a 20% premium to our unchanged NZD 11.00 (AUD 10.00) fair value estimate. Fisher & Paykel's fiscal 2018 net profit after tax, or NPAT, of NZD 190 million was broadly in line with our NZD 188 million estimate. The 4% miss on the revenue line was largely offset by solid EBIT margin improvement to 27.5% for the year, up from 26.8% a year ago and beating our 26.3% forecast, aided further by a lower-than-expected net interest charge.