The COVID-driven tailwind of the past two years is unwinding quickly for Fisher & Paykel Healthcare. Consumable and hardware sales are falling as the now bloated hospital installed base adjusts to the post- COVID environment.
FPH’s trading update provided revenue guidance for the full year to be in the range of NZ$1,650-1,700 million at current exchange rates.
Hospital consumable sales have fallen sharply from around February leaving 2H22 sales down approximately 13%. This implies that hardware sales have fallen around 75% compared to last year.
This is not wholly surprising as the frenzy of the last two years pulled forward significant sales creating an insurmountable comparable figure for FPH to achieve.
The opportunity exists for the company to drive the utilisation of the now significantly enlarged installed base of hospital hardware, but this is challenging while hospitals are operationally stretched and COVID ‘cheque books’ are being pulled back.
FPH’s guidance points to a flat outcome for 2H22 hospital consumables compared to 1H22. The sharper slowdown in hardware sales was unexpected and has been much more abrupt, probably commencing around September 2021. We understand there are few hospitals in developed markets that do not have a healthy supply of respiratory hardware.
Investment view
FPH noted the elevated freight costs impacting long term gross margin target of 65% by about 250bp. But the company did not mention what is happening to SG&A costs and this may be important when looking for clues on FY23f performance.
The utilisation and consumables sales recovery in FY24f depends on a robust sales force response in FY23f. This will be challenging for FPH as sales are falling but the SG&A spend must be maintained or even increased.
Consensus earnings forecasts have adjusted to the guidance, but we think there is unusually high uncertainty on FY23f sales and margins, particularly on the downside.
Further, while consensus forecast have recognised the slowing earnings environment, we think this does not account for the difficult execution required by FPH.
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 retained our Sell recommendation.
