F&P holders pop the corks

By Shoeshine

Friday 8th November 2002

A year after Fisher & Paykel split itself in two loyal shareholders have a lot to celebrate. But it has been a white-knuckle ride.

Until three years ago the whiteware icon seemed one of the dozier inhabitants of the Stock Exchange boards, reporting profits a little up or a little down each year.

The problem was that F&P, a minnow among whiteware makers, struggled to get good margins on its products, and still does.

Although it was an innovative designer and kept up to speed in manufacturing efficiency, dishwashers and fridges were sliding steadily into the commodity rut where brute size counts more than nimble management.

It wasn't until 1999 that the market began to catch on to the potential of the still-small healthcare division, where earnings had been growing at double-digit rates.

For the March 2000 year F&P posted a bumper $5.5 million profit, with Healthcare contributing earnings before interest and tax of $28.5 million. The shares were trading at around $6, valuing the company at $710 million.

Unknown to the market F&P was already hatching plans to bring its child prodigy into the spotlight.

In June that year it confirmed market rumours Deutsche Bank had been appointed to advise on the corporate structure.

It didn't take the market long to work out F&P was investigating a split of the healthcare and whiteware divisions.

As it became apparent how much value was hidden away in Healthcare the shares went into a steep climb.

When the split was announced on December 19, 2000 they climbed 66c to $8.26, against $5 a year previously.

F&P still had a lot of work to do but over the next year Healthcare maintained the double-digit earnings growth, pushing the shares still higher.

On the day before the split actually happened November 8 last year they closed at $13.50, valuing F&P at $1.6 billion.

Since the split the two divisions, Appliances and Healthcare, have had their ups and downs.

F&P, and Deutsche, drew flak from some local institutions pre-split by selling an allocation to US institutions "too cheaply."

The instos argued this was effectively a transfer of wealth from shareholders of the old F&P to a few big US players.

Chief executive Gary Paykel said the local instos were just talking their own book but the market seemingly quickly proved him wrong.

The American Depository Shares, representing four ordinary shares each, sold for $US18, equivalent to $10.95 an ordinary share.They rose to $US26.05 in just two days, furnishing their owners with a $334 million gain.

Many of the US holders promptly took their profit.

Those who held on may have regretted it.In New Zealand dollar terms the shares rose to $18.75 before Christmas but deflation followed quickly.

First came an announcement from Florida-based Innomed about a new product that would "revolutionise" sleep apnoea treatment, an area in which Healthcare had been chalking up strong growth.

The reaction was somewhat overdone as Innomed's product didn't even compete with Healthcare's.

But only a few days later the company announced a first-quarter profit 6% lower than the same quarter a year previously.

The market had been pricing Healthcare as a double-digit growth stock and sent the shares plunging, initially to $10.50 and then as low as $7.80, less than half their late-2001 peak. It has been climbing since, passing $11 last week.

F&P Appliances, which has a 19.8% Healthcare shareholding, shared its offshoot's fortunes, running up to $11.10 in early 2002 just after the split, then falling to $8.50 in August.

It has since run up strongly, trading at about $11 last week after telling the annual meeting September first-half earnings were tracking at double those of the previous year.

UBS Warburg analyst David Lane says both stocks were overbought, then oversold in the global mid-year share-dumping session and are now working towards their correct equilibrium.

Yesterday's $34 million first-half profit from Healthcare will underpin the share price and a solid result is expected from Appliances today.

This boom-bust-boom tale leaves Shoeshine with a couple of apologies to make.

First, he originally thought the whole split idea was daft and wouldn't add any value for shareholders in the old F&P.

Probably the best place to start is the F&P share price of $6 in early 2000, just before the market started pricing in a possible split. At that time the market capitalisation, as noted, was about $710 million.

The market now values the two stocks combined at $1.85 billion.

Analysts expect further share price gains, which could deliver a combined market capitalisation of treble the F&P of three years ago.

Second, it seems Deutsche and the old F&P board got the valuation of Healthcare shares, in anything other than the very short term, just about right.

Sure, some US instos might have made a quick killing but they can hardly be blamed for cashing in on buyers' early overexuberance.

That must surely be the story. It couldn't possibly be that the complaining local institutions were just talking up the price of their own Healthcare allocations.

Could it?

Correction

GPG

In last week's column on this page, Shoeshine said incorrectly that Guinness Peat Group had not disclosed the terms of its director service contracts in its latest annual report.

The terms are in fact disclosed in the report.

Shoeshine also incorrectly attributed the GPG open letter to Rubicon shareholders of October 21 to executive director Tony Gibbs.

The letter was written by director Gary Weiss.

The errors are regretted.

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