Stock talk: Fisher & Paykel Healthcare

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Sinclair Currie, Principal and Co-Portfolio Manager, NovaPort Capital

The Fisher & Paykel Group has a long history in the New Zealand marketplace, more prominently as a leading manufacturer of whitegoods and home appliances. Ten years ago the company spun out its less well known health care division – Fisher & Paykel Healthcare (ASX code: FPH) – which manufactures respiratory, humidification and sleep therapy products.

The NovaPort Small Companies Fund holds Fisher & Paykel Healthcare as it meets our quality and return hurdles. Qualitatively, the company has differentiated products sold into markets where quality, reliability and reputation matter. Quantitatively, the company has demonstrated robust cash generation and enjoyed strong sales growth which we expect to continue with new product launches underway.

Let’s take a look at this investment in greater detail.

Fisher & Paykel Healthcare has a global presence and leading market position in hospital-based non-invasive ventilation systems. It also accounts for a more modest share of the global market for flow generators and masks used to treat obstructive sleep apnoea (OSA). The company has consistently generated impressive growth in sales volumes, however in recent years, earnings have suffered from the strength of the New Zealand dollar as well as a step-up in the cost base as it invests in areas such as direct distribution.

We target an A$3.00 share price for this stock and our investment thesis is based on the following five points of upside for this business:

1) New product releases driving volume growth

Fisher & Paykel has recently launched its new ICON platform of flow generators and more recently, a new range of masks, which are gaining acceptance in the marketplace. The company is also innovating its humidification and respiratory technology into new areas such as laparoscopic insufflation (in the surgical theatre) as well as the management of chronic obstructive pulmonary disease.

2) Diversified manufacturing base to reduce costs

The company has established a facility in Mexico to manufacture consumable items at a considerable cost advantage to its Auckland base. This facility is ramping up production with capacity to expand further and deliver appreciable upside to margins.

3) Underlying market growth rates robust

Although the OSA market is maturing, it has continued to grow despite a weak economic environment. In the respiratory humidification business, sales growth has remained strong thanks to underlying growth in hospital demand combined with the benefit of new product innovation. We forecast Fisher & Paykel Healthcare to maintain an overall double-digit constant currency growth rate for the next three years.

4) Stable management team with a demonstrable track record

The incumbent management have overseen growth in revenues grow from USD$89 million in 2002 to USD$417 million in 2012. This has been generated through product innovation and market expansion and the company maintains a strong focus on research and development.

5) Foreign exchange shifts clouding business performance

The NZ dollar has almost doubled against the US Dollar since 2002. Costs have been mostly denominated in NZ dollars while revenues are in foreign currencies, thus the company’s margins have come under pressure from the rising exchange rate.

For much of the past ten years, the company was able to mitigate some of this with an advantageous hedging programme, which is now unwinding. Fisher & Payke Healthcare would benefit from a decline in the value of the NZ Dollar.

  • Monday’s opening price: $2.00
  • Target price: $3.00

Sinclair Currie is the Principal and Co-Portfolio Manager at NovaPort Capital. The NovaPort investment team has nearly 40 years combined investment experience, specialising in smaller companies and microcap markets. 

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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