FPH due for earnings upgrade cycle

Greg Easton
Greg Easton
Fisher and Paykel Healthcare is at the start of of a 12-month to 18-month earnings cycle upgrade, partly driven by a strong acceleration in sales of high margin Obstructive Sleep Apnoea masks, Craigs Investment Partners broker Greg Easton says.

Apart from the Pilairo and Eson masks, there was at least one additional major new launch due shortly.

''We think investors will react favourably to an improving quality of earnings as hedging profits account for a lower and lower proportion of reported earnings.''

In the past three years, FPH had invested heavily in expanding production capacity in Tijuana, Mexico, and Building 3 in East Tamaki.

Capital expenditure reached $67 million in the 2012 financial year and Mr Easton expected it to reach $61 million this year.

However, he expected it to halve in 2014 to $30 million to $35 million. Although Obstructive Sleep Apnoea was likely to be the key catalyst for a nearer term re-rating of the company, RAC (respiratory humidification) was seen as having the most potential in the long term, he said.

''FPH is the world leader in respiratory humidification and has built a brand with hospitals over the past 30 years based on quality and innovation.''

Penetration remained low in several markets, Mr Easton said.

There were three key risks for FPH.

The first was that the New Zealand dollar appreciated further against the United States currency, which would mute expectations for profit growth in the near term.

The second was that the impact of competitive bidding could be worse than expected, he said.

''We have been relatively conservative in our expectations that Medicare's competitive bidding would result in a cumulative 7.6% decline in revenue directly exposed to it. The ultimate impact could be worse.''

And third, competition from Resmed, if the company released a new or updated range or masks, could hurt the company, he said.

Craigs retained its buy recommendation on FPH.

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