New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Fisher & Paykel Healthcare Corp / Equity Bottom-Up

<h2>F&amp;P&nbsp;Healthcare<br>Tailwinds Still Flowing</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>F&amp;P&nbsp;Healthcare&nbsp;(FPH) provided a trading update confirming an exceptional start to FY21, underpinned by continued momentum in its Hospital division, with its products used as a front-line therapy for&nbsp;COVID-19 patients.&nbsp;FPH&nbsp;is a high quality growth company and a material beneficiary of&nbsp;COVID-19. Earnings momentum is strong, although it becomes more challenging as consensus better reflects this, it begins to cycle larger numbers and when Hospital equipment sales fade from elevated levels. We see better value growth stocks in both the NZ market and globally.</p>
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<h3>Exceptional 4m21; FY21 on track to be a bumper year, with&nbsp;FPH's&nbsp;revised assumption set (once again) conservative</h3>
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<p>FPH&nbsp;has (unsurprisingly) seen&nbsp;a very strong start to FY21. We understand monthly growth rates remain&nbsp;volatile&nbsp;which means&nbsp;FPH&nbsp;will not provide 1H20 guidance, as is typical at its Annual Meeting, albeit it did provide an updated 'guide' for FY21 (revenue&nbsp;~NZ$1.61bn;&nbsp;NPAT&nbsp;NZ$365–385m) based on a revised set of&nbsp;COVID-19 assumptions which we view as conservative. We increase our FY21 forecasts (which were already top of the revised&nbsp;range) to above&nbsp;FPH's&nbsp;'guide', reflecting stronger revenue growth.</p>
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<li>Hospital — stellar trading: Revenue is up +91% YoY for the first four months of FY21 (Hardware +390%; Consumables +48%). This is also ahead of indications in June, with a strong July. We understand this reflects a rebuilding of stocks by hospitals, elevated COVID-19 hospitalisations in some countries / US states and a shift in COVID-19 clinical practice in ICU towards high flow nasal cannula oxygen therapy, away from invasive ventilation (both therapies where FPH is the market leader).</li>
<li>Homecare&nbsp;holding up:&nbsp;Despite some areas of weakness / pressure&nbsp;Homecare&nbsp;revenue is +up 5% for the first four months of FY21, this is consistent with our FY21 expectations.</li>
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<h3>Where to thereafter?</h3>
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<p>The path beyond FY21 remains an area of debate, with a number of unanswerable questions on behaviour and adoption rates, particularly when we return to a more 'normal' backdrop without the unprecedented level of government funding support.&nbsp;Whenever the demand for Hospital equipment and elevated&nbsp;COVID-19 hospitalisations&nbsp;diminishes, we expect growth to be difficult, with potential for disappointment if consumables revenue cannot replace the spike in hardware in particular.&nbsp;COVID-19 may prove to be an enduring catalyst to higher adoption rates (as&nbsp;assumed in our&nbsp;DCF), however, the extent of the uplift remains up for debate.</p>
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<h3>Growth, high returns and lower interest rates a powerful combination</h3>
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<p>FPH's share price and valuation metrics have seen a remarkable step-change through 2020 (price +67%; market cap +NZ$8.6bn; PE +34%). The combination of high returns, a lift in growth and lower interest rates has been a powerful source of multiple expansion (easy to see in hindsight, particularly in light of what we know now about COVID-19). We lift our target price to NZ$32.50 following revisions to our team cost of capital inputs which materially lifts our DCF, with FPH one of the most favourably impacted across our coverage. Despite this lift, we are still below current trading levels; retain UNDERPERFORM.</p>
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<div><strong>Chelsea Leadbetter CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
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F&amp;P&nbsp;Healthcare Tailwinds Still Flowing

UNDERPERFORM
F&amp;P&nbsp;Healthcare&nbsp;(FPH) provided a trading update confirming an exceptional start to FY21, underpinned by continued momentum in its Hospital division, with its products used as a front-line therapy for&nbsp;COVID-19 patients.&nbsp;FPH&nbsp;is a high quality growth company and a material beneficiary of&nbsp;COVID-19. Earnings momentum is strong, although it becomes more challenging as consensus better reflects this, it begins to cycle larger numbers and when Hospital equipment sales fade from elevated levels. We see better value growth stocks in both the NZ market and globally.


Exceptional 4m21; FY21 on track to be a bumper year, with&nbsp;FPH's&nbsp;revised assumption set (once again) conservative


FPH&nbsp;has (unsurprisingly) seen&nbsp;a very strong start to FY21. We understand monthly growth rates remain&nbsp;volatile&nbsp;which means&nbsp;FPH&nbsp;will not provide 1H20 guidance, as is typical at its Annual Meeting, albeit it did provide an updated 'guide' for FY21 (revenue&nbsp;~NZ$1.61bn;&nbsp;NPAT&nbsp;NZ$365–385m) based on a revised set of&nbsp;COVID-19 assumptions which we view as conservative. We increase our FY21 forecasts (which were already top of the revised&nbsp;range) to above&nbsp;FPH's&nbsp;'guide', reflecting stronger revenue growth.



Hospital — stellar trading: Revenue is up +91% YoY for the first four months of FY21 (Hardware +390%; Consumables +48%). This is also ahead of indications in June, with a strong July. We understand this reflects a rebuilding of stocks by hospitals, elevated COVID-19 hospitalisations in some countries / US states and a shift in COVID-19 clinical practice in ICU towards high flow nasal cannula oxygen therapy, away from invasive ventilation (both therapies where FPH is the market leader).
Homecare&nbsp;holding up:&nbsp;Despite some areas of weakness / pressure&nbsp;Homecare&nbsp;revenue is +up 5% for the first four months of FY21, this is consistent with our FY21 expectations.



Where to thereafter?


The path beyond FY21 remains an area of debate, with a number of unanswerable questions on behaviour and adoption rates, particularly when we return to a more 'normal' backdrop without the unprecedented level of government funding support.&nbsp;Whenever the demand for Hospital equipment and elevated&nbsp;COVID-19 hospitalisations&nbsp;diminishes, we expect growth to be difficult, with potential for disappointment if consumables revenue cannot replace the spike in hardware in particular.&nbsp;COVID-19 may prove to be an enduring catalyst to higher adoption rates (as&nbsp;assumed in our&nbsp;DCF), however, the extent of the uplift remains up for debate.


Growth, high returns and lower interest rates a powerful combination


FPH's share price and valuation metrics have seen a remarkable step-change through 2020 (price +67%; market cap +NZ$8.6bn; PE +34%). The combination of high returns, a lift in growth and lower interest rates has been a powerful source of multiple expansion (easy to see in hindsight, particularly in light of what we know now about COVID-19). We lift our target price to NZ$32.50 following revisions to our team cost of capital inputs which materially lifts our DCF, with FPH one of the most favourably impacted across our coverage. Despite this lift, we are still below current trading levels; retain UNDERPERFORM.




Chelsea Leadbetter CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262




Fisher & Paykel Healthcare Corp

F&P Healthcare: Tailwinds Still Flowing