Morningstar Equities

Morningstar Equities

Fisher & Paykel Healthcare Corporation Limited FPH, FHP-NZ| New Products and Cost Savings Deliver Earnings Growth for Fisher & Paykel Healthcare (corrected)

Morningstar Recommendation: Reduce
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
Financial forecast data in this report has been corrected.
Fisher & Paykel Healthcare reported very strong results for first-half fiscal 2014. Normalised net profit after tax, or NPAT, of NZD 44.5 million was ahead of our forecast of NZD 43 million, and 34% above last year's NPAT. Strong constant-currency revenue growth, coupled with margin improvement through improved product mix and cost efficiencies, were the key profit growth drivers. We haven't changed our fiscal 2014 and 2015 forecasts of NZD 90 million each. Our fair value estimate holds at NZD 3.30 per share. The stock is modestly overpriced at current levels as the market seems to be overestimating the firm's growth during the next few years. Our narrow economic moat rating also stands, reflecting intangible assets (namely, patents) and switching costs in respiratory and acute care products.

The overarching theme for the firm remains unchanged. The company continues to produce market-leading products for both respiratory & acute care, or RAC, and obstructive sleep apnea, or OSA. New products, especially consumables, are boosting constant-currency growth and aiding margins, since the overall product mix continues to improve. Growth continues unabated in new applications such as noninvasive ventilation, oxygen therapy, and humidity therapy. These applications now constitute nearly 40% of RAC's consumables revenue, up from 33% in fiscal 2012. These products are helping Fisher & Paykel Healthcare deliver improved patient outcomes by reducing the intensity and length of hospital stay. This has resulted in valuable cost savings for care providers, which is a key demand driver.

Tower Limited TWR| Tower Reports a Messy Fiscal 2013 Result as it Transforms into a Small General Insurer

Morningstar Recommendation: Hold
Nathan Zaia, Morningstar Analyst - 02 9276 4491
The transformation toward a solely general insurance-focused business was always going to make Tower's fiscal 2013 results messy. After selling the life insurance, health insurance and investments businesses during the year, and with its remaining life assets still up for sale, we focus on the core general insurance business. An increase in large claims events meant that after-tax profit for the general insurance business -- excluding finance and corporate expenses -- declined 29% to NZD 19 million. Growth in gross earned premiums covered the increase in reinsurance costs. Claims as a percentage of premiums increased by 3.7%, to 50.6%, due to higher large claim weather events in New Zealand, and Cyclone Evan in the Pacific. A return toward more "normal" claims levels should help improve earnings. An unimputed final dividend of NZD 6 cents per share has been declared, bringing the full-year dividend to NZD 11 cents, in line with our forecast.

No change to our fair value estimate of NZD 1.90. We expect Tower to grow gross written premiums at 6% per annum, supported by management's strategic focus on increasing product bundling, differentiating itself to peers by being easy to do business with, and utilising distribution partners. The smaller, cleaner, more focused, Tower could also become a takeover target. Its 4.7% market share of gross written premiums in New Zealand, although higher in its key business lines such as home insurance (10.5% market share), contents (10.3%) and motor vehicles (6.4%), leaves it at structural disadvantage to larger peers who would benefit from their access to cheaper capital, and have better operating leverage. While Tower remains a well-known brand, general insurers don't benefit from favourable competitive positions due to strong competition and commoditylike products. Given its relatively small size and dearth of durable competitive advantage, we plan to cease coverage of Tower on 31 January 2014.

Magellan Financial Group Limited MFG| Magellan Focused on Strong Growth in Funds Under Management

Morningstar Recommendation: Hold
David Ellis, Morningstar Analyst - 02 9276 4582
Narrow-moat Magellan Financial Group reported another impressive performance in October with net inflows of AUD 1.54 billion, including net institutional flows of AUD 1.35 billion and net retail inflows of AUD 170 million. The strong year-on-year funds under management, or FUM, growth multiple of 5 times supports our positive view. Total FUM outstanding increased to AUD 18.17 billion, representing a month-on-month change of 11%, and the specialist global equities fund manager is well on track to reach our forecast FUM outstanding of AUD 21 billion by June 2014. Higher-margin retail FUM was AUD 5.02 billion at 31 October, with lower-margin institutional FUM dominating, at AUD 13.15 billion.

The strong metrics are a welcome sight, considering that the majority of the industry continues to experience net outflows. Thankfully, this industry trend is starting to reverse due to improved investor sentiment and stronger global equity markets. U.S. markets are at record highs, benefiting Magellan's large capitalisation U.S.-centric investment portfolio. We anticipate these macro tailwinds to continue to support strong underlying earnings growth. Our positive investment thesis is intact, with the firm's competitive advantages supporting organic fund growth and operating margins. We maintain our AUD 12 per share fair value estimate and, at current prices, Magellan is fairly valued.

We anticipate increasing demand for international equities from this rapidly growing sector and, in our opinion, Magellan is very well positioned to capitalise on its strong brand and impressive investment track record. We believe Magellan's narrow economic moat is built on moderate switching costs, brand power and a track record of outstanding investment performance. Tailwinds such as structurally lower Australian dollar and a stronger recovery in global share markets will likely encourage investors to invest further in international equities.

FKP - Downgrade due to price change

GPT Group - Downgrade due to price change

Super Retail Group - Downgrade due to price change

Transfield Services - Upgrade due to price change

Mesoblast - Downgrade due to price change

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