UPDATED: F&P Healthcare says earnings growth may stall in 2015 as currency rates bite
Fisher & Paykel Healthcare Corp [NZX: FPH], which exports 98 percent of its breathing masks and respirators, expects profit growth to stall in the coming year as it takes a $32 million hit to operating profit, reflecting reduced hedging contracts and less favourable currency spot rates.
The Auckland-based company said profit rose 26 percent to $97.1 million in the year ended March 31, in line with guidance, and it expects "similar" profit in the 2015 year. Operating revenue rose 12 percent to $623.4 million in 2014 on increased volumes and is expected to be about $640 million in 2015, it said. The forecasts are based on the New Zealand dollar trading at 86 US cents although many currency strategists expect the kiwi to fall over the coming year.
F&P Healthcare, which competes with Resmed and Respironics, improved profitability in 2014 with its gross margin rising to 58.6 percent from 55.3 percent, as it benefited from new products, operating efficiencies in New Zealand and ramping up production in Mexico. Still, earnings are being crimped as the value of export revenue is reduced when converted into New Zealand dollars as the local currency holds at an "elevated" level. Foreign exchange hedging gains contributed $54.6 million to its $143.5 million operating profit in 2014 although the company's hedging contracts are rolling off in the current year.
"The underlying numbers look solid. With those better margins flowing though, they are battling the high exchange rate pretty well," said James Lindsay, who holds the stock among the $400 million of equities he helps manage at Tyndall Investment Management. "This business on an underlying basis is growing very, very soundly. It's just those currency headwinds, which would be no new news to anybody."
In 2014, operating revenue from respiratory humidification products rose 12 percent to $336.9 million while obstructive sleep apnea increased 15 percent to $270 million. F&P Healthcare said it is gaining market share as sales from both major product groups increased at about twice the industry pace. In 2015, growth in the "mid teens" is expected on a constant currency basis from both groups, chief executive Michael Daniell said on a conference call.
The gross margin in constant currency terms is expected to increase by about 200 basis points in 2015, from 393 basis points in 2014. Net profit in constant currency terms,should increase about 40 percent in 2015, from a 46 percent pace in 2014, Daniell said.
"The company continues to have favourable foreign exchange hedging in place although substantially less than in the 2014 year," Daniell said. "Despite the challenge of this large roll-off in hedging, we have momentum in both of our product groups and we believe that we can offset that headwind in the 2015 financial year."
Capital expenditure will probably step up to $50 million to $55 million in the coming year from $31.9 million in 2014 as the company invests in new products, production lines to support those products and increased capacity for existing lines, it said.
F&P Healthcare will pay a final dividend of 7 cents a share on July 4, taking the total for the year to 12.4 cents, unchanged from 2013. Subject to earnings performance, the company expects to maintain its dividend level in real terms until it reaches its target capital structure of a debt to debt plus equity ratio of 5 to 15 percent, excluding unrealised financial instrument gains or losses.
The 2014 payout represents 71 percent of after-tax profit, down from 87 percent in 2013. Longer term, the company expects a payout ratio of more than 60 percent to maintain its target gearing.
Shares in F&P Healthcare edged up 0.9 percent to $4.19, taking its gain so far this year to 8.3 percent.