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Shares in F&P Healthcare rise to a record as market darling outperforms

Shares in Fisher & Paykel Healthcare rose to a record after the maker of breathing masks and humidifiers raised its profit forecast for the sixth time in two years, cementing its place as a market darling.

The Auckland-based company posted a 10 percent gain in first-half profit to $48.9 million and raised its expectation for annual earnings to a range of $105 million to $110 million as it increased sales of new and existing products, gained market share and boosted margins. Its shares rose 3 percent to a record $5.79 and the stock was the heaviest traded on the NZX this morning.

"I don't think we've seen a sequence of profit upgrades from any New Zealand company in the last 10 years of this nature," said Andrew Bascand, managing director of Habour Asset Management, which holds the shares among its $1.2 billion of equities. "It's our largest position in our portfolios right across all our portfolios so I can't say anything more than that can I. We really like this company."

F&P Healthcare, which competes with Resmed and Respironics, increased its first-half gross profit margin to 60.6 percent from 58.4 percent in the same period a year earlier due to a favourable product mix, logistics and manufacturing improvements and increased volume from the company's Mexico manufacturing facility. The company estimates it is tapping a potential market for respiratory products of more than US$5 billion a year and more than 100 million patients.

"We continued to gain market share across the broad range of applications for our products," said chief executive Michael Daniell. "Our strategic direction remains consistent as we focus on developing innovative products, increasing the number of patients who can benefit from our products, extending our range of products and growing our international presence."

The company is benefiting from expansions of its Auckland manufacturing base and into Mexico in previous years, which is helping it to lower costs, increase volumes and boost profit margins. Increased sales of higher-margin products such as Optiflow and Simplus is also boosting margins.

"They are now gaining large margin expansion associated with the investment that occurred," said Habour's Bascand. "To get a 2 percentage point improvement in margin is quite phenomenal."

First-half revenue increased 4 percent to a record $317.4 million, and the company raised its forecast for annual revenue to $660 million, ahead of last year's revenue of $623.4 million.

"In a number of product areas they have really met the product requirements and are gaining market share," said Bascand, who noted sales for most of F&P Healthcare's products were tracking in the "mid-teens", outpacing overall market growth of about 10 percent.

Excluding the impact of currency movements, revenue for the company's respiratory and acute care products advanced 13 percent in the first half, with sales of new applications outside of the company's traditional invasive ventilation market jumping 26 percent. New applications for the products include oxygen therapy, non-invasive ventilation humidity therapy and surgery.

Sales in constant currency terms for obstructive sleep apnea products grew 15 percent, with mask revenue up 20 percent, the company said.

F&P Healthcare said research and development spending rose 21 percent to $31.3 million, outpacing a 5.5 percent gain in sales and administrative expenses to $90.7 million.

"They have got a whole new pipeline of products in the next two to three to four years coming through," said Bascand. "This company demands a premium market valuation and it certainly is a great example of a kiwi company that has just continued to invest in research and development."

F&P Healthcare expects its gearing to reduce to the target range it has been moving towards in the past four years by the end of this financial year. It paid out 66 percent of after-tax net profit as dividends in the first half, or 5.8 cents a share, higher than the 5.5 cents expected by some investors.