F&P Healthcare is due to report its first half result on Tuesday. Photo / Supplied.
Fisher and Paykel Healthcare is set to report a decline in first-half profit as the company pulls back from mid-Covid levels, when demand for its respiratory products was red hot (the firm will report on Tuesday).
Over the last two financial years F&P Healthcare has supplied $880 million worth of hospital hardware, the equivalent of about 10 years’ hardware sales prior to the pandemic.
The March 2021 year was the peak, with revenue hitting a record $1.97 billion, up 56 per cent on the previous year’s, and net profit coming in at $524m, up 82 per cent.
Trading remained elevated in the following year, albeit at reduced levels.
In August, the company issued guidance for the first half of revenue of around $670m and a net profit of $85m to $95m.
That would compare with the prior year’s first-half revenue of $900m and a net profit of $222m.
It remains to be seen how much Covid will change things in the long term for F&P Healthcare, New Zealand’s biggest company by market cap, but the market should get a few clues from Tuesday’s result.
Jarden senior analyst Adrian Allbon said it was a question of whether the market was overstocked with F&P Healthcare product, or whether it was getting back to normal.
“Within the hospital division, which has experienced strong demand volatility due to Covid, we estimate hardware revenues of $60m (versus first-half 2022 of $221m and second-half 2022 of $102m) and consumables revenues of $352m (first-half 2022 $449m and second-half 2022 $435m),” he said in a report.
“Our forecast for a 60 per cent gross margin is below FPH’s long-term target of 65 per cent, which represents a further sequential fall on recent periods.
“In light of FPH’s August trading update, this reflects a combination of freight cost pressures, a lower new applications consumables revenue mix and manufacturing inefficiencies.”
On the operational expenditure side, Allbon expected to see continued growth in investment in both salesforce and R&D, resulting in ebit of $115m, with an operating margin of 18 per cent - also well below the long-term 30 per cent target and prior periods.
The Jarden report said the key issue driving recent revenue downgrades has been an overstock of the company’s high nasal flow “Optiflow” product, caused by Omicron proving to be of materially lower severity compared with hospital expectations borne from experience with the Delta variant.
It noted a strong start to the US flu season and high levels of the respiratory virus RSV cases could potentially drive a faster normalisation of stock levels, although this would be a feature of the second half only if it eventuated - with flu and RSV cases only ramping up after F&P Healthcare’s first-half balance date.
“We believe it remains too early for FPH to provide 2023 guidance, so the market is also likely to remain nervous on when the recent downgrade cycle will end,” Allbon said.
“Ongoing uncertainty factors continue to be customer inventory levels and the pace of clinical practice change, concerns that are partially balanced by the strong start to the Northern Hemisphere flu/RSV season, normalising freight rates and the potential for a China Covid outbreak, noting daily cases have recently accelerated.”
Jarden has a 12-month price target of $23.00 for F&P Healthcare and has retained its “overweight” rating on the stock.
Forsyth Barr analyst Matt Montgomerie said he expected Tuesday’s result to be towards the lower end of the company’s guidance range.
“I think the full year will be the base and thereafter, I expect to see a return to the growth levels that we were accustomed to prior to Covid,” he said.
“It’s still about finding the absolute base level of earnings, which is still uncertain,” he said.
“Where we are today suggests that it could be slightly lower than what they are guiding to, but at a high level, it does not change the overall picture for the company.”
Montgomerie still sees a strong pathway of growth for the company.
“Covid accelerated awareness of the technology and there is no change to our, or the market’s view, of their ability to execute on Covid-accelerated growth opportunities,” Montgomerie said.
“The high-level fundamentals remain intact, but there is still uncertainty in the near term.”
F&P Healthcare shares last traded at around $20.72 compared with its record high of $37.68 reached in August 2020.
Aside from its result, analysts expect to get more information on its ambitious Karaka development.
In September, F&P Healthcare said it plans to spend $275m buying a 105ha Karaka property for a new second campus to complement its existing East Tāmaki facility.
The company said its current site was nearing capacity and it needed more land to enable its continued growth.
Chair Scott St John said the company had consistently signalled the importance of long-term infrastructure planning to help it deliver on its growth strategy.
F&P Healthcare has aspirations of doubling its constant currency revenue every five to six years.
“In order to take advantage of the opportunities ahead of us, we need more space,” St John said at the time.