Fisher & Paykel Healthcare devotees are breathing easier after this interim result. The numbers were in-line with heavily downgraded guidance from the August annual meeting, but the green shoots of growth in consumables has the fan club back in full voice. FPH remains a high quality company indeed, but the share price amply reflects that. We revise our recommendation to Hold now that the COVID correction is over.
A weak 1H23 result, as expected. Total operating revenue for 1H23 of $690.6 million was ahead of the $670 million guided at the August trading update but was still down 23% compared to last year. Net profit of $95.9 million was -57% compared to 1H22 (-65% in constant currency terms) and was flattered by a low tax rate of 16%. This outcome was well flagged and reflected a normalisation of the COVID-boosted sales from the previous period.
Hospitals overstocked. Hospitals were over-prepared for Omicron cases and are now over-stocked on consumables. There are signs, according to FPH, that this excess inventory is being worked through and that sales have been increasing again in recent months. A larger than usual flu season may help, but the problem remains.
A key benefit to FPH of the higher installed base of HFNO units (high flow nasal oxygen therapy) was supposedly to drive utilisation of the therapy in hospitals. A bigger installed base would logically drive sales of consumables, but there is little evidence to suggest this theory is playing out, yet. The de-stocking of excess consumable inventory may be masking this, but we cannot be sure.
Homecare improving. The introduction of the new Evora mask for the homecare OSA (obstructive sleep apnea) market has performed well. Segment revenue of $249.9 million increased 10% with masks and accessories revenue up 16%.
Gross margin pressure easing. Freight rates have been improving and the company has lowered headcount so that gross margin is expected to improve by 200bp in 2H23f after falling 325bp in 1H23. Operational costs are expected to be 5% higher in FY23f.
Investment View
Although the company would not provide full year guidance, it said second half revenue would be higher than the first half. Operating costs are expected to increase ~8% (CC) in FY23 and gross margin should be higher than 1H23.
The de-stocking issue is mostly over, according to FPH, so the path is once again clear for earnings growth on new products and sales efficiency.
Consensus forecasts are once again building in some heady growth in earnings for which the share price is happily accommodating.
We acknowledge the unwind of the excess sales from COVID is mostly complete and that FPH is back on track for earnings growth. For this reason, we have upgraded our recommendation to Hold from Sell. The valuation metrics remain too enthusiastic to warrant a more positive call.
Risks To Investment View
The slowdown in sales may not be as steep as we expect, and the company may cope with rising costs better than anticipated. A recurrence of COVID as a new variant night also keep hospitalisations higher than expected.
Recommendation
We have upgraded our recommendation to Hold from Sell.
