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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 Healthcare</h2>
Unmasking ResMed’s 2Q20 Result
Recent data points continue to support market share gains for ResMed (RMD) in the Homecare segment, likely at the expense of F&amp;P Healthcare (FPH). This has been helped by a steady flow of new products. Our (and market) forecasts incorporate a re-acceleration in Homecare growth from FY21. We view this as an area of downside risk, given a highly competitive market rife with new products, and an incumbent (RMD) with strong momentum and products that are resonating well in market.
Key take-outs
<ul>
<li>RMD 2Q20: Another standout quarter — with market share gains evident.</li>
<li>Online data: Trends support meaningful market share gain for RMD over recent quarters (and weeks), at the expense of both FPH and Phillips.</li>
<li>New products: A highly competitive landscape — the past 12 months has seen four new masks from RMD, one from Phillips and one from FPH.</li>
<li>Competitive bidding (CB): Industry anecdotes suggest downside risk to mask prices from CB 2021. Circa 5% of FPH revenue is exposed to CB.</li>
</ul>
RMD 2Q20 — strong quarter across the board
RMD reported a 2Q20 result ahead of consensus, with the key highlight another standout quarter for masks. Market share gains were evident globally for RMD in masks with +16% constant currency (CC) growth, well ahead of estimated industry growth (“high single digits”). Devices saw +8% CC growth, modestly ahead of industry growth. Rounding out a strong result — gross margins were up +60bp, driven by strength in the high margin mask category.
Our read through for FPH
<ul>
<li>Industry insights: Competitor commentary supports an attractive industry backdrop (growth of c. +6–8%), with sleep apnea underdiagnosed globally.</li>
<li>Masks: Our FPH forecasts are for market share losses in FY20. Recent results from competitors provide nothing to change this view. We assume new products are successful in changing this trajectory from FY21; albeit this is reliant on a favourable industry response in what is currently a competitive landscape of well-regarded products. One new mask has been launched and we expect to see at least one more in the next 6 months.</li>
<li>Flow generators: RMD and Phillips remain the dominant players in this segment. We see nothing to change this view; particularly given FPH’s strategy is to focus almost entirely on masks.</li>
</ul>
Figure 1. FPH and RMD metrics
<table class="table table-striped">
<thead>
<tr>
<td style="width: 27pt;">
&nbsp;
</td>
<td style="width: 63pt;">
&nbsp;
</td>
<td style="width: 36pt;">
Market
</td>
<td style="width: 36pt;"></td>
<td style="width: 36pt;">
12-mth
</td>
<td colspan="2" style="width: 76.5pt;">
12 month forward
</td>
<td style="width: 27.1pt;"></td>
</tr>
<tr>
<td style="width: 27pt;">
&nbsp;
</td>
<td style="width: 63pt;">
Rating
</td>
<td style="width: 36pt;">
Cap (bn)
</td>
<td style="width: 36pt;">
Price
</td>
<td style="width: 36pt;">
Chg
</td>
<td style="width: 31.5pt;">
PE
</td>
<td style="width: 45pt;">
EV/EBITDA
</td>
<td style="width: 27.1pt;">
PEG
</td>
</tr>
</thead>
<tbody>
<tr>
<td style="width: 27pt;">
FPH
</td>
<td style="width: 63pt;">
UNDERPERFORM
</td>
<td style="width: 36pt;">
NZ$13.4
</td>
<td style="width: 36pt;">
NZ$23.30
</td>
<td style="width: 36pt;">
85.5%
</td>
<td style="width: 31.5pt;">
45.8x
</td>
<td style="width: 45pt;">
29.8x
</td>
<td style="width: 27.1pt;">
3.3x
</td>
</tr>
<tr>
<td style="width: 27pt;">
RMD
</td>
<td style="width: 63pt;">
n/a
</td>
<td style="width: 36pt;">
A$36.0
</td>
<td style="width: 36pt;">
A$25.05
</td>
<td style="width: 36pt;">
91.7%
</td>
<td style="width: 31.5pt;">
37.0x
</td>
<td style="width: 45pt;">
25.4x
</td>
<td style="width: 27.1pt;">
3.1x
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis, Eikon&nbsp;
<div class="content-highlight">
Investment View
FPH is a high quality company with an attractive outlook supported by a long runway of organic growth opportunities, particularly in the Hospital segment where clinical evidence continues to build. However, valuation metrics are elevated even when adjusting for growth, relative to global peers, which leaves little room for error. UNDERPERFORM.&nbsp;
</div>
Chelsea Leadbetter, CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

F&amp;P Healthcare
Unmasking ResMed’s 2Q20 Result
Recent data points continue to support market share gains for ResMed (RMD) in the Homecare segment, likely at the expense of F&amp;P Healthcare (FPH). This has been helped by a steady flow of new products. Our (and market) forecasts incorporate a re-acceleration in Homecare growth from FY21. We view this as an area of downside risk, given a highly competitive market rife with new products, and an incumbent (RMD) with strong momentum and products that are resonating well in market.
Key take-outs

RMD 2Q20: Another standout quarter — with market share gains evident.
Online data: Trends support meaningful market share gain for RMD over recent quarters (and weeks), at the expense of both FPH and Phillips.
New products: A highly competitive landscape — the past 12 months has seen four new masks from RMD, one from Phillips and one from FPH.
Competitive bidding (CB): Industry anecdotes suggest downside risk to mask prices from CB 2021. Circa 5% of FPH revenue is exposed to CB.

RMD 2Q20 — strong quarter across the board
RMD reported a 2Q20 result ahead of consensus, with the key highlight another standout quarter for masks. Market share gains were evident globally for RMD in masks with +16% constant currency (CC) growth, well ahead of estimated industry growth (“high single digits”). Devices saw +8% CC growth, modestly ahead of industry growth. Rounding out a strong result — gross margins were up +60bp, driven by strength in the high margin mask category.
Our read through for FPH

Industry insights: Competitor commentary supports an attractive industry backdrop (growth of c. +6–8%), with sleep apnea underdiagnosed globally.
Masks: Our FPH forecasts are for market share losses in FY20. Recent results from competitors provide nothing to change this view. We assume new products are successful in changing this trajectory from FY21; albeit this is reliant on a favourable industry response in what is currently a competitive landscape of well-regarded products. One new mask has been launched and we expect to see at least one more in the next 6 months.
Flow generators: RMD and Phillips remain the dominant players in this segment. We see nothing to change this view; particularly given FPH’s strategy is to focus almost entirely on masks.

Figure 1. FPH and RMD metrics




&nbsp;


&nbsp;


Market



12-mth


12 month forward





&nbsp;


Rating


Cap (bn)


Price


Chg


PE


EV/EBITDA


PEG






FPH


UNDERPERFORM


NZ$13.4


NZ$23.30


85.5%


45.8x


29.8x


3.3x




RMD


n/a


A$36.0


A$25.05


91.7%


37.0x


25.4x


3.1x




Source: Forsyth Barr analysis, Eikon&nbsp;

Investment View
FPH is a high quality company with an attractive outlook supported by a long runway of organic growth opportunities, particularly in the Hospital segment where clinical evidence continues to build. However, valuation metrics are elevated even when adjusting for growth, relative to global peers, which leaves little room for error. UNDERPERFORM.&nbsp;

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

F&P Healthcare: Unmasking ResMed’s 2Q20 Result