Originally Posted by
Greekwatchdog
And For Bars view..
F&P Healthcare's (FPH) FY22 downgrade marks the first genuine insight into what the transition to a post COVID world may look like,
and it's not a good start. We estimate that 2H22 EBIT will be down ~-50% versus 2H21 (off a high base) and below 2H20 which only
had a modest contribution from COVID-19 demand. Our proprietary revenue proxy also suggests that revenue has decelerated
meaningfully towards the end of 2H22 which adds further questions to what FY23 may look like. We think FY23 is likely to be the
'new base' but believe it could be challenging with significant negative operating leverage, as operating expenses continue to grow and
freight costs are expected to remain elevated while a rebound in revenue may take time to materialise. Looking beyond this,
we continue to see FPH as well positioned to deliver long-term revenue growth and see a return to its long-term margin targets.
Trading on ~46x 12m forward PE, which is a modest premium to peers on an absolute and relative basis, we retain NEUTRAL with a
reduced target price of NZ$25.05.
What's changed?
First time FY22 quantitative guidance provided
FPH provided FY22 revenue guidance of between NZ$1,675m and NZ$1,700m (we estimate implied hospital consumables revenue
of ~NZ$900m and hospital hardware of ~NZ$320m — both of which were below our and consensus expectations). Full year gross
margins are expected to be ~62.5%, with the deviation relative to its long term target (~65%) principally attributable to freight costs.
FPH retained full year SG&A costs guidance for ~+9% growth relative to FY21. Highlighting FPH's ongoing cost investment, we
estimate that 2H22 EBIT will be below 2H20 despite revenue being ~NZ$100m higher with 2H22 likely to be FPH's lowest second
half EBIT margin since 2014 (~25%), down from the elevated base of 38% in 2H21.
What does FY23 look like? Negative operating leverage likely a key feature
The revenue trajectory is the key unknown but we believe FY23 is likely to be the 'new base'. That said, the absolute base level and
subsequent use of its products was made no clearer. There is a wide range of outcomes but we expect it to be a multi-year period
before FPH fully utilises its materially increased base of hospital hardware. Despite this uncertainty we think the trajectory of the
cost base is relatively clear with limited variation irrespective of the revenue path. Consistent with history, we expect FPH to grow
operating expenses by ~+8–10% annually over the medium-term as it continues to invest for growth. While we consider this both a
value add and necessary strategy, it brings with it some short term risks to earnings. At this juncture, we assume downside risk to
FPH's long term EBIT margin target (~30%) and forecast a base of ~27% in FY23 with a gradual recovery over the medium-term.