Fisher & Paykel Healthcare seizes its moment

One of the shining lights in Australian equity portfolios during a very difficult March quarter was Fisher & Paykel Healthcare, a global leader in the manufacture of respiratory humidifiers.

Demand for the company’s products, which are used in intensive care units (ICUs), has grown strongly during the COVID-19 crisis, but the company believes there is also long-term growth in demand for its technology.

Since the start of the year, the New Zealand-based, dual-listed stock climbed 43 per cent from $21.10 to a high of $30.23 on March 30, before easing back to its current price of around $27.

The company’s return on equity has been between 25 per cent and 30 per cent over the past few years. Based on its 2018/19 earnings, it is trading on a high pre-earnings ratio of 38 times.

One fund manager with Fisher and Paykel Healthcare in its portfolio is Selector Funds Management. At the end of 2019, the Selector High Conviction Equity Fund was the top-rated Australian equity manager in the Mercer survey, with a 12-month return of 39.2 per cent. It was also ranked number one over two, three, five and seven years.

In the March quarter, the fund fell 24.5 per cent – more than its benchmark, the S&P/All Ordinaries Index, which fell 23.9 per cent.

The big stock price falls in its portfolio were Flight Centre, IOOF Holdings and Aristocrat Leisure.

There was a strong representation of healthcare stocks among its positive contributors, including Resmed, CSL and Fisher & Paykel Healthcare. While the Resmed and CSL stories are well known to investors, Fisher & Paykel is not so familiar.

The company specialises in the production of respiratory care equipment and is a global leader in humidification technology. Its Optiflow nasal high flow technology is used in ICUs all over the world.

Selector Funds Management is backing the company’s view that unmet demand for its products will be an issue for the long term and not just during the COVID-19 crisis.

Selector’s latest quarterly report says: “Its equipment is used in 70 per cent of ICUs in the United States and Europe but it estimates that equipment is only available to around 10 per cent of patients who could be treated using it.

“Most of its sales are to hospitals but it is moving into the home care market, where its devices are used in the treatment of obstructive sleep apnea.

“It makes significant investment in technology, at around 9 per cent of revenue each year, and has new manufacturing facilities in New Zealand and Mexico.”

The company reported 24 per cent profit growth for its September half-year and increased its dividend 23 per cent. It has very low debt.

Another fund with Fisher & Paykel Healthcare in its portfolio is Bennelong Australian Equities Fund.

The fund was down 19.9 per cent in the March quarter, compared with the 23.4 per cent fall in its benchmark, the S&P/ASX 300 Accumulation Index.

Stocks in the portfolio that held up well included CSL and Fisher & Paykel Healthcare.

In its latest performance update, Bennelong Australian Equity Partners says: “The portfolio has a bias to product manufacturers over service providers, especially those with a face-to-face customer offering.

“For example, in the healthcare sector, the portfolio is invested in companies like CSL and Fisher & Paykel Healthcare that manufacture and supply medicines and medical devices, as opposed to diagnostics, pathology, GP or other healthcare service providers that are struggling to operate in the current environment.”

Bennelong says it is taking the opportunity during the equity market disruption to upgrade the quality of the portfolio.

“This has involved buying more of our highest conviction picks and selling down or out of those with business financial or other risks that we considered too great for the current environment,” it says.

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.