Ammunition for F & P split

By DITA DE BONI

Institutional investors wanting Fisher & Paykel to separate out its lucrative healthcare division have been given further ammunition from the company's September half-year result, released yesterday.

The report detailed 200 redundancies made in an effort to revive profits in the whiteware division, which saw its slim margins shrink further in the period.

The division's pre-tax earnings margin dropped to 3 per cent from 5.2 per cent a year earlier. Its earnings of $9.7 million were generated from revenues of $324.7 million.

Difficulties in the division were foreshadowed at the annual meeting in August, but most analysts the Business Herald spoke to said the whiteware result was worse than expected.

Shareholders have been told to wait for a verdict on the future of the healthcare division. Meanwhile, it has turned in another stellar result, its earnings up 20.5 per cent to $28.5 million and its pre-tax earnings margin amounting to 35.5 per cent of revenue.

Institutional investors and analysts have called for the healthcare division to be spun off as a separate company to "unlock" the wealth in that higher-yielding division. Healthcare contributed 60 per cent of F & P's pre-tax earnings in the year to March 2000. Its sales are expected to double in the next five years.

There is also shareholder disquiet over the level of capital expenditure within the whiteware division.

One analyst, who did not want to be named, said there was little likelihood whiteware would ever be able to provide returns comparable to healthcare as it produced a commodity product and had "little fat" after several restructuring rounds.

Simon Botherway, head of equities at Arcus Investment Management, said the company would need to continue to be rational and disciplined about its appliance division, "and focused on it, because that's the part of the business that requires attention."

"It's a disappointing result from whiteware, especially as [some] had expected a 10 per cent pre-tax earnings margin in the mid term as opposed to margin contraction."

The company yesterday reduced that target margin to 7.5 per cent.

UBS Warburg securities analyst David Lane said the result for whiteware was worse than expected. And even though chief executive Gary Paykel and his management team had said they expected some improvement in operating profit in the second six-month period, Mr Lane said he remained pessimistic about whiteware.

"The amount of capital investment Fisher & Paykel has ploughed into its whiteware division, compared with returns, does not make it an attractive option."



Deutsche Bank is due to report shortly to the company on its options for the healthcare business.

Gary Paykel has blamed Korean appliance imports into Australia and New Zealand for depressed margins, and for the up to 200 redundancies from middle management, which will cost $8 million.

The company has asked the Government to take a dumping action against the Korean companies.

The chairman, Sir Colin Maiden, said Fisher & Paykel was considering its options against similar competition in Australia.

The fall in the value of both the New Zealand and Australian dollar increased costs for imported materials, while the benefits of the lower dollar had not flowed to the company because of hedging cover obtained at 50USc.

But Stefan Preston, of the Pacific Retail Group, said yesterday that Fisher & Paykel should stop blaming Korean-branded imports and look at its retailing arrangements.

Fisher & Paykel has an exclusive distributor arrangement with its retailers that prohibits them from selling competitors' appliances.

"Instead of blaming foreign dumping, they should look at the cost of maintaining the distribution agreement and the incentive that it provides retailers outside the agreement to stock other brands."

Pacific Retail Group has a third of the country's appliance market and Mr Preston said it could sell its share of the market in Fisher & Paykel products if it was allowed.

Fisher & Paykel holds around 65 per cent of the domestic appliance market.

"We would love to stock Fisher & Paykel, as it is New Zealand's favourite brand, but our philosophy is always to give customers a choice, and we would never stock just one brand."

Also challenging Fisher & Paykel's view of events is the fact that Australian whiteware-maker Email has seen margins rise despite Korean competition in that market.