Report Card: Poor growth follows share price fall at F&P Healthcare

By David McEwen

Friday 12th July 2002

Depending on us ... daily. That's a motto Fisher & Paykel Healthcare Corporation adopts in its first annual report as a stand-alone company.

Although the motto probably refers to patients who rely on its high-tech equipment, it equally applies to shareholders.

These unfortunates have seen the value of their investment plunge from a post-listing high of $18.75 in December to about $8. That said, most paid nothing for the shares, which were divvied out when Fisher & Paykel Industries split into appliance and healthcare divisions last year.

There is little in the annual report to indicate why FPH should be so reviled by the market. More likely, the shares were overbought to start with.

Helpfully, the report shows figures in most cases on a "continuing operations" basis. This removes distortions from the pre-split results to give an accurate picture of the company's performance.

Unusually for a newly listed company, it also produces a comprehensive five-year financial summary on that basis (in both New Zealand and US dollars). All numbers mentioned below are for continuing operations.

The report shows a company that in many respects is one of the best performers on the New Zealand market.

Operating revenues have more than doubled in the past five years to $214.6 million in the year to March 31 and net profit was a record $62.3 million (five times last year's $11.7 million). This means the company has delivered an impressive net profit margin of 30%. Also, despite a high equity-to-total-funds ratio of 80%, the company has generated a superb 38% return on shareholders' funds.

Despite the company's efforts to show normalised results, bottom line comparisons between one year and another can still be misleading. For example FPH, which sells products to more than 90 countries, has found itself vulnerable to currency movements.

In its 2001 financial year it booked $58 million in currency losses but this year picked up $13 million in foreign exchange gains.

When comparing the company's results on a pre-abnormals basis, we find that the company has shown little profit growth in the past year ($82 million against $80 million previously). That may lie behind investor disappointment in what is supposed to be a growth stock, with average growth in the previous three years of around 40%.

In his review, chairman Gary Paykel prefers to focus on the net profit figures but notes that "with our exports from New Zealand invoiced in a variety of currencies, predominantly the US dollar and the euro, we are particularly conscious of the need to manage foreign exchange risks."

He points out the company has a policy of using contracts and options for up to three years, without saying whether the huge losses and gains of the past couple of years were despite or because of these protective devices.

Chief executive Michael Daniell gets plenty of room to say his piece in the report but virtually ignores profits and performance in favour of the company's innovative healthcare products, global product reach" and R&D and manufacturing capabilities.

Curiously, there is no revelation about his vision, description of what makes FPH a great company, outline of competitive pressures or strategy for expansion.

Nor is there a traditional "outlook" subsection that gives a hint about the year to come.

The corporate governance statement barely fills a page but covers the basics. One part that stands out is the policy of "requiring approval in advance of the buying and selling of company shares, and confirmation that it is not based on 'inside information'."

The company's lack of growth last year and content-light annual report can be attributed to the distractions caused by the enormous task of separating Fisher & Paykel Industries into two companies.

As Mr Paykel points out: "Our transition from a division to a standalone company has placed considerable demands on our management team."

Now that this undoubtedly difficult period is out of the way, shareholders will be hoping they can depend on FPH for better disclosure and more growth next year.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Web: www.mcewen.co.nz, email: davidm@mcewen.co.nz

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