Company Overview: Fisher & Paykel Healthcare Corporation Limited (ASX: FPH) is engaged in designing, manufacturing, and marketing of products and systems for utilisation in surgery, respiratory care, acute care, and the therapy of disruptive sleep apnea. FHP’s products are sold in more than 120 countries worldwide, depicting a robust international presence.

FPH Details

 FPH Rides on Robust Product Portfolio & International Expansion: Fisher & Paykel Healthcare Corporation Limited (ASX: FPH) is one of the leading firms in medical devices and systems, whose products and services are utilised for respiratory care, surgery and treating obstructive sleep apnea. The market capitalisation of the company stood at ~A$16.20 billion as at 24 February 2021. Talking about 1HFY21, the company’s overall results were primarily driven by higher demand for its Hospital hardware, especially its Optiflow^TM and Airvo^TM systems. In the Hospital product group, operating revenue in 1HFY21 increased a whopping 93% year over year, depicting a shift in clinical practice towards using nasal high flow therapy as a front-line cure for COVID-19 patients in hospital. During the period, net profit after tax grew by 86% year over year and came in at NZ$225.5 million. Operating revenue in 1HFY21 stood at NZ$910.2 million, indicating an increase of 59% on pcp basis (or 61% on a constant currency basis, pcp). As COVID-19 virus continues to spur across Europe, North America, South America and South Asia, the company witnessed higher sales in hardware and consumables.

Coming to the Homecare product group, operating revenues came in at NZ$226.2 million, a 5% growth on a year over year basis. However, the company witnessed a reduction in gross margins, which came in at 61.7% in 1HFY21, owing to higher usage of air freight and the elevated costs associated with it. Excluding these additional freight costs, gross margin was in line with the 1HFY20 figure on a constant currency basis.

Operating Margin Highlight (Source: Company Reports)

Robust Increase in New Hospital Applications (Source: Company reports)

Top 10 Shareholders: The top 10 shareholders together form around 20.69% of the total shareholdings, while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc. is the entity holding maximum shares in the company at 5.23%. Capital Research Global Investors is the second-largest shareholder, with a holding of 4.79%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

Key Metrics & Decent Liquidity Position: The company exited 1HFY21 with NZ$158.3 in total cash and cash equivalents. Net cash stood at ~NZ$78.1 million, at the end of the period, up from NZ$42.2 million at the end of 31 March 2020. Gearing ratio as at 30 September 2020 came in at -7.1%. Cash inflow from operating activities came in at NZ$218.1 million in 1HFY21, depicting an increase of 92% year over year. While net cash outflow from investing activities was at NZ$81.9 million. Free cash in 1HFY21 stood at NZ$118.3 million, as compared to NZ$22.6 million in the 1HFY20.

In 1HFY21, the company had a current ratio of 1.91x, higher than the 2HFY20 figure of 1.55x, representing a decent liquidity position. Debt to Equity ratio for the same time span stood at 0.09x, lower than the industry median of 0.13x. Cash cycle days in 1HFY21 stood at 146.4 days, lower than 2HFY20 cash cycle days of 162.6. EBITDA and net margins for the same time span stood at 37.5% and 24.8%, higher than the industry median of 24.8% and 15.2%, respectively.

Past year Financial Performance for Year Ending 31 March

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: The investment in the company is subject to various risks and uncertainties, which may impact its performance. These risks include market access risk, cybersecurity and data protection, business continuity. The company’s activities expose it to a variety of financial risks, including market risk, currency risk and interest rate risk, credit risks and liquidity risk. The company continues to expect higher volume of air freight along with elevated freight costs. Also, stiff competition from peers remains a potential concern.

Outlook: For FY21, FPH predicts revenue and net profit after tax to be higher than the previous guidance of NZ$1.72 billion of revenues and a range of NZ$400 million to NZ$415 million of NPAT. The company remains on track to witness higher sales from its Hospital hardware as local hospitalisation continues to spur around the world. Further, robust growth in FPH’s products used for nasal high flow therapy in the home remains a key positive. The company expects to progress the acceleration of investment in manufacturing capacity, to achieve its growth plan. The company also remains on track to commercialise products from its continuous flow of technology and expects to deliver decent growth, in the days ahead.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Currently, the stock is trading below the average of its 52-week’s high and low level of $34.92 and $21.07, respectively. The stock of the company has corrected by ~13.5% in the past three months. On a technical analysis front, the stock has a support level of ~A$25.79 and a resistance level of ~A$30.76. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some premium as compared to its peer median, considering its robust demand for its Hospital and Homecare products, geographical expansion, decent 1HFY21 key numbers, and decent liquidity position. For the purpose, we have taken the peer group - Medical Developments International Ltd (ASX: MVP), Opthea Ltd (ASX: OPT), and Cochlear Ltd (ASX: COH), to name a few. Considering decent financial performance, augmented demand for its hospital and homecare product, decent liquidity position, and encouraging long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of A$27.37, down by ~2.668% as on 24 February 2021.

FPH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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