FPH released first half FY23 guidance. See here

They are comparing numbers to pre-pandemic. So if we look pre-pandemic the company was CAGRing earnings approx. 14% per annum. If we were to hypothetically assume covid never happened and continue that rate of growth through to now, their first half would be $844m. If we compare that to what they just guided to $670m, its under 7% CAGR. Then based off this you would think that the shares should trade on a lower multiple to account for the lower growth. So the pre-pandemic first half they are comparing to company was trading over 40x earnings, now its on about 29x earnings. The market is pricing in this lower growth to continue. What shareholders need to work out is if the lower growth is due to a pull forward of demand and eventually, once this cycles through, we return to historical growth levels? Or is the company now a mid-high single digit grower? Your individual opinion on that question will determine whether current pricing is cheap or not. 

My personal opinion is this is not really super cheap now for the risks, but not expensive either. Which means, I will be doing nothing in my real life account, but selling in my Strawman account (because of the limited capital nature of strawman). I can see a world where it returns to 14% growth, but can also see its plausible it might just stay a high single digit grower. 

Reasoning being I believe there is somewhat pulled forward and growth will return once stock levels of consumables get used. Their OSA business is still growing nicely and should keep becoming a larger portion of revenue and there is large tailwinds in the future for that general industry - this is be a growth driver. They are also in the midst of a CAPEX cycle where they are building out manufacturing plants. Once these come online the margins should be better than they were historically adding a boost to earnings.

FPH released full year results today. Revenue was in line with the guidance the company provided to market early April. Net margins held up better than I had expected at just over 22%. Net margins will be important to watch going forward considering FPH are cycling some huge covid sales and freight, labor and input costs rise around the globe.

Things I noted:-

• They mentioned supplying 10-years worth of hardware to hospitals in the last 2. Does this mean that we should expect subdued hardware sales for the foreseeable future? (27% of hospital sales is hardware – 73% consumables)
• Flagged freight costs as the main reason for declining gross margins.
• Management are unsure of the extent existing clients have brought forward sales and stockpiling products.
• A higher installed hardware base should translate to increased consumable sales moving forward.
• Post covid elective surgery backlog should be good for FPH especially their new Optiflow accessory products which is used with anesthesia.
• OSA sales slightly improved even though OSA diagnosis over the last year was severely restricted. This segment should show significant improvement this year.
• Increased dividend putting the current price on a dividend yield of approx. 2%
• Tijuana manufacturing plant near completion which should increase margins. Management have previously flagged net margins of 30% by FY25 however this is not mentioned in this report from what I can see. Will be interesting to see if that is the case with the freight, input and labor cost increases going forward.
• FPH are entering a capex & heavy R&D investment cycle over the next 5 years. Management calling for $700m spend in land and buildings to beef up manufacturing and distribution capabilities.
• The biggest growth region for FPH hospital products is Asia Pacific which continued to hit record numbers and has nearly overtaken Europe as the second largest region behind North America. See below growth YoY

FPH released half year results this morning.

Overall sales and revenue are flat. I think most people were expecting their elevated covid sales to cycle through and be much lower to more "normalised" levels. However, biggest thing I think to take away from the result, is that Covid 19 has increased their install base in hospitals around the world, especially in developing nations. This has resulted in their hospital consumable sales up 24%. With the much higher install bas the consumable revenue should now have a much larger baseline of "normalised sales".

I also expect their Homecare division to see some growth in the second half. The recall in Phillips CPAP products may help them steal some market share. In my opinion the company should focus on this segment now while the opportunity is there.

Freight costs remain elevated. This should normalise even slightly in future which should help keep elevate margins. 

There are so many moving parts here its hard to fully predict where FPH sales and profits will end up post covid, so im still wary of jumping in now. Id like to see a full year cycle through and have a clearer outlook. I do own some shares IRL but have sold on strawman due to the limited nature of capital in the strawman portfolios.

• 2% decline in net profit after tax to $221.8 million.
• 1% decline in operating revenue to $900.0 million, or 2% growth in constant currency.
• 2% decline in Hospital operating revenue to $670.2 million, or 1% growth in constant currency.
• 24% constant currency revenue growth for new applications consumables; i.e. products used in
• noninvasive ventilation, Optiflow nasal high flow therapy and surgical applications, accounting for
• 72% of Hospital consumables revenue.
• 0.3% growth in Homecare operating revenue, or 3% growth in constant currency.
• Investment in R&D was 8% of revenue, or $75.7 million.
• 6% increase in interim dividend to 17 cps (H1 FY21: 16 cps).

FPH released a trading update this morning to accompany their annual report. The update is for the first 4 x trading months ending 31st of July 2021. 

Hospital:-

• 62% decline in total hardware sales
• 14% decline in total consumable sales
• Outside Europe and North America hardware sales grew 42% and consumables grew 31%.

My comments - The decline in sales into European and North American hospitals is predictable as their vaccination rates have been growing and the period comparable to the height of Covid last year. I expect these to continue to normalise. The increased growth outside of these areas in more developing countries is something that makes sense but i did not expect. Generally most of FPH revenue comes from more developed nations. While these sales aree obviously a covid bump due to the underdeveloped nations not being as vaccinated, I believe this gives FPH an opportunity to expand their footprint outside NA & Europe which should lead to increased normalised sales post covid. 

Homecare:-

• Sales up 4%

My comments - The growth in the segment should start to increase as economies open up and more people can go back to visiting their GP and diagnosis of respiratory illness & sleep apnea continues. This is a big tailwind for FPH and Resmed. Phillips recalls should also help boost this segment. In FY21 FPH had 24% of revenue from homecare products. I expect this % to increase YOY in the future. 

Outlook & my comments:-

• Obviously company gave no specific guidance, which is understandable, flagging the unpredictability of covid outbreaks and how long it will last and rates of vaccination.
• Hospital sales (while slightly declining) should remain elevated for some time, until the world vaccination effort is completed. 
• Hospitals continue to stockpile. Once covid hospitalisations reduce, this could see some weakness in sales, until this is flushed through. 
• Increased hardware installations and increased product awareness (especially in develping countries as mentioned above) should benefit FPH in the longterm with consumable sales.
• Freight costs remain elevated. This should normalise even slightly in future which will help margins when covid sales normalise to help soften the revenue impact. 

Summary - There are so many moving parts here its hard to fully predict where FPH sales and profits will end up post covid. As you can see in my Strawman portfolio i sold down my holding significantly post FY21 result. I can see FPH trading sideways or within a range for even a few years and feel my money is better put to work elsewhere for now. However i kept a small holding because this is a super high quality company. And if there is a significant sell off when revenues normalise, thats when im hopefully i can add more.

Highlights:-

• 82% growth in NPAT to $524.2m(NZD)
• 56% growth in operating revenue to $1.97b(NZD) - 61% in constant currency
• 87% growth in Hospital operating revenue to $1.5b(NZD)
• 49% constant currency revenue growth for new applications consumables
• 2% growth in Homecare operating revenue
• Investment in R&D was 7% of revenue, or $136.7m(NZD)
• 42% increase in final divided to 22.0 cps (NZD)

In FPH half year result they guided for EPS between 69c - 72c NZD. They beat this by 25% and achieved 91.1c NZD.

It would be crazy to assume that this will continue. FPH themselves are very cautious in their forward looking statements and have given no guidance. It is very hard to know where normalised earnings will land in FY22 and FY23. I think Covid will stay around a little longer than everyone thinks and outbreaks will continue to occur across the globe for some time, with FPH hospital division continuing to benefit. Whether that is at the same magnitude as we see here in these results remains to be seen. Nevertheless, FPH should see a pick up in their homecare division sales once doctor visits and sleep apnea and respiratory condition diagnosis returns.

One small concern is with freight and input cost increases reducing margins. If we see inflation continue this will be an ongoing concern and may impact growth if FPH are unable to pass these increased costs to customers. 

These are my intial thoughts while glancing over the results announcement. Much more work needed. Working out a valuation for this one will be tricky!

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