Markets wrap: Heavyweight stock Fisher & Paykel Healthcare weighs on market

Friday, 26 May 2023

A decline in heavyweight stock Fisher & Paykel Healthcare pulled down the market.

The sharemarket fell, pulled down by weakness in heavyweight Fisher & Paykel Healthcare.

The benchmark S&P/NZX 50 Index slid 1.1%, or 129.825 points, 11,830.03 on Friday. On the broader market 52 stocks rose and 74 fell with $158 million shares traded.

Fisher & Paykel Healthcare, the largest stock on the index, fell 6.5% to $23.98 after the medical device maker said annual profit fell 34% and margins weakened.

Profit fell to $250.3m in the year to the end of March, from $376.9m a year earlier. Revenue slid 6% to $1.58 billion, in line with the company’s forecast for revenue of between $1.55b to $1.6b. It expects revenue to increase to $1.7b this year.

Fisher & Paykel experienced a surge in demand for its products during the pandemic, selling 10 years’ worth of devices in two years as hospital clinicians turned to nasal high flow therapy as a front-line treatment for Covid-19 patients. Demand subsequently dipped as hospitals worked through their excess inventory, but is now starting to return to normal with second-half revenue up 14%.

The company said higher freight costs and manufacturing inefficiencies due to demand fluctuations weighed on its gross profit margin, which fell 369 basis points to 59.4% in constant currency terms.

“During the pandemic, we had a responsibility to get as much product as possible into the hands of our customers and now as demand progresses towards more of a normal state, we're shifting from a supply at all cost mentality to supply in a sustainable, profitable manner,” said managing director Lewis Gradon.

Chief financial officer Lyndal York told analysts on a conference call that the company now expects margins to lift about 150 basis points a year, returning to its long-term gross margin target of 65% within three to four years.

But investors appeared sceptical.

“The market was expecting their gross margin to lift a little bit, and it didn't, it came in below where the market was thinking,” said Greg Main, a director of wealth management at Jarden. “That's just taking longer to normalise than what the market expected.”

The Detail podcast hears how F&P Healthcare hired hundreds of new workers and started up a crisis management team based on the assumption that Covid-19 would go global.

While the company has said margins would increase, markets would “take that with a grain of salt” until they saw it, Main said.

Property company Stride gained 3.1% to $1.35. The company reported a loss of $116.7m, compared with a profit of $112.3m the year earlier after the value of its investment properties fell $118.5m, compared with a $30.7m net valuation gain the previous year.

Stride’s rental income rose 8% to $71.1m.

The company said its distributable profit, which is used to calculate dividends, increased to 10.66 cents per share, exceeding its November forecast of 10c to 10.5c, but down from 10.95c the previous year.

Stride will pay a dividend of 8c and said it expects to pay the same amount this year.

NZ Rural Land Co rose 3.5% to 88c.

The rural land investor upgraded its forecast for 2024 adjusted funds from operations by 4.8% to 5.25c to 5.75c, due to an earnings boost from the recent purchase of two forestry properties.

NZ Rural Land Co will suspend its first-half dividend because the board believed its share price undervalued its assets and free cashflow.

Cash previously earmarked for dividends would be used to purchase shares on market and to repay a convertible note which was issued to support the forestry acquisition, the company said.

The board expected to resume dividend payments for the second half of the financial year, subject to prevailing market conditions, it said.

Mainfreight fell 0.6% to $68, adding to its 3.3% decline on Thursday after the transport and logistics firm reported a record annual profit, but warned activity has started to slow due to deteriorating macroeconomic conditions, reducing freight volumes and higher inflation.

In a note titled “Rough road ahead”, Craigs Investment Partners said it expects Mainfreight’s earnings per share in the first half of the company’s financial year to decline about 25%, which may see some share price weakness. Still, the brokerage retained its “overweight” rating on the stock based on a positive long-term valuation.

Pacific Edge advanced 1.1% to 46.5c. The stock shed 2.1% on Thursday after the bladder cancer diagnostics company widened its annual loss.

Forsyth Barr analysts said there were few surprises in the result, with both costs and revenue in line with expectations. However in a note titled “Stuck in the waiting room”, the analysts highlighted that tests per clinician in the US had been flat for the past 12 quarters.

“We are supportive of the investment strategy but now expect the timeline to breakeven to be longer than previously forecast,” they said.

Forsyth Barr downgraded its expectations for earnings over the coming three years reflecting higher costs and lowered its 12-month target price to 49c from 52c.