Fisher and Paykel Healthcare delivers another record profit, but is it sustainable?

F&P chief executive and managing director Lewis Gradon. Photo / NZ Herald

Expectations were running high that respiratory products maker Fisher & Paykel Healthcare would deliver a strong result for year to March and the company did not disappoint.

The company - which has had strong demand for its products due to Covid-19 - reported a 37 per cent increase in net profit to a record $287.3m.

Auckland-based F&P Healthcare, which has in the past been conservative in its forecasts, now expects its net profit to swell to $325m to $340m for the 2021 year.

The question being asked was whether the company's performance was sustainable and enough to justify its high share price - which closed at a record $33.50 after more than doubling over the last 12 months.

"The big question facing the company will be how it can maintain its profitability while catering for excess demand," Shane Solly, senior portfolio manager at Harbour Asset Management, said.

For the first three months of the current financial year, F&P Healthcare's product group growth has continued to accelerate, with hardware growth of over 300 per cent, and hospital consumables tracking at more than a one-third increase, compared to the first three months of 2020.

Chief executive Lewis Gradon said that kind of growth rate was "probably not sustainable but I think once we have installed those devices, they will continue being used".

"They are useful for a lot more than just treating Covid-19 patients, so we think the experience that our customers are having with those therapies is going to translate into continued usage after the pandemic," he said.

Covid-19 was changing medical practises and the way clinicians viewed F&P Healthcare products.

"Once they get it, we think that they will keep using it for other patients afterwards."

Gradon said the company could not predict how long Covid-19 would go on but said the guidance was on the basis that it would end at the beginning of the second half - October.

"We are not saying that it will end then, we are saying that our guidance is based on it going until then."

The onset of Covid-19 brought international aviation to a near standstill, which meant higher airfreight costs.

Gradon said the company absorbed the extra costs and had not passed those on to customers "as a matter of principle".

He said those higher costs could come to as much as 200 basis points of its gross margin.

"It is pulling our profitability down because we don't want to raise our prices to customers, if we can avoid it," he said.

F&P Healthcare has doubled its capital expenditure to $160m - $120m of which will be on manufacturing equipment.

Fisher Funds' senior portfolio manager Sam Dickie said the increased acceptance of F&P Healthcare 's "Optiflow" product was a "step change" for the exposure, acceptance and efficacy of the product for the treatment of Covid-19.

And earnings sustainability?

"I think that these growth rates are not sustainable, but that the level of earnings definitely are."