This morning healthcare business Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) reported its financial results for the half-year ending September 30 2017.
Below is a summary of the results with comparisons to the prior corresponding period. All figures in NZ dollars.
- Operating revenue of $458.4m, up 8%
- Net profit of $81.3m, up 4%
- Excluding legal costs net profit growth was 13%
- Earnings per share up 4% to 14.3c
- Gross margin increased 1.16% to 66%
- Mexico now contributes 35% of manufacturing output
- R&D expenses grew by 13% to $47 million, around 10% of revenue
- Interim dividend of 8.75cps, up 6%
- Forecast for full year revenue "approaching"$1b
- Forecast for full year net profit of $185m-$190m
- The group retains a strong balance sheet with gearing at just 3.8%, cash on hand of $59 million
This was a typically strong result from a quality company with just a couple of blemishes around the cost growth associated with its ongoing patent dispute and legal battles with rival ResMed Inc. (CHESS) (ASX: RMD).
Over the half FPH spent an additional $9.8 million in legal costs (over the first half last year) as it blows cash on lawyers' fees in multiple courtroom battles across Europe and North America.
Both Fisher & Paykel and ResMed have accused each other of multiple patent infringements in a tit-for-tat confrontation that has escalated into a cost blowout, which paints neither company in a good light.
On an operating basis FPH's "Hospital product" division grew revenues 11% to $262.5 million. It includes products used in respiratory, acute and surgical care, with sales of its Optiflow nasal therapy growing by the "mid-20s percent range."
The highlight of the result was the increased gross margins that are largely supported by the move of its manufacturing facilities from New Zealand to Tijuana in Mexico, with the company accelerating its move into Mexico over 2018. This is because Mexican labour costs are far cheaper, with it selling most of its products into the neighbouring U.S. healthcare market.
However, the Mexican move is unlikely to impress U.S. President Donald Trump who is intent on ripping up large parts of the North American Free Trade Agreement, which could mean Fisher & Paykel taking more costly legal advice over its cross-border free trade as a minimum.
Outlook
Fisher & Paykel is a strong business although it's no secret with the group selling for 47x annualised earnings at $13.40 on the NZ stock exchange. The AUD scrip sells for $12.06 on an FX-adjusted basis and is down 2.6% in morning trade.
For me the valuation is too rich given the underlying growth rates and mounting legal costs. For those reasons I expect the stock may come under selling pressure over the months ahead.
