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Opinion: F&P Appliances, a nimble David among a world of Goliaths

By Andrew Macdonald of NZPA

Friday 24th June 2005

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You might forgive whiteware maker Fisher & Paykel Appliances for being a bit confident.

While small by global standards, it's a slick manufacturer that is responsive to market conditions and confident in strategy.

With that surety, it's carving out a niche across the world for its high-end kitchen and laundry whiteware.

Its key markets: New Zealand, Australia and more recently, the United States, where it has an alliance with US firm Whirlpool.

Speak to sharebrokers and analysts and they'll say Appliances' shares are worth more than their current $3.29. They have traded between $2.58 and $4.88 in the past year.

Macquarie equities investment director Arthur Lim gives Appliances' shares a discount cashflow valuation of $4.80, and in 12 months' time a price of $4.20.

He says Appliances' current share price belies the store placed in the company by numerous mum and dad investors.

"That's where, I think, the thoughts are that FPA (Appliances), with its open (share) register becomes vulnerable to a takeover," Lim says.

"I don't think anybody who wants Fisher & Paykel will get it easily," he says.

"They would have to pay a reasonably good price to be successful, I would have thought."

And that's where the story gets interesting.

Enter the picture Chinese whiteware behemoth Haier, which has a presence in New Zealand and is currently having a crack at widening its presence in the lucrative US market.

Haier, which churns out an affordable product range, is part of a consortium offering $US1.25 ($NZ1.76) billion, or about $US16 a share, to takeover US icon whiteware brand Maytag.

"We don't really see that Haier taking over Maytag as having significant competition implications (for Appliances) in the short term," Lim says.

In the US, Appliances has pitched itself at the top end of the market and had successfully built a presence there, he says.

That makes Appliances - with its quality product, management, and emphasis on research and development - a potential takeover target in a sector apparently on the cusp of global consolidation.

"It's seen as brain player, an innovative player, and if you are a mass market producer, like Whirlpool or Haier, part of uplifting your game is to be able to access innovation and products," Lim says.

ABN Amro Craigs broker Matt Willis says the Haier-Maytag story doesn't necessarily mean consolidation, but may spell a ramp up in whiteware competition in the domestic market.

"Appliances does have good scale, which helps when you're dealing with competition that's putting the squeeze on margins."

New Zealand is Appliances' happy hunting ground, and it has carefully built a retail distribution network, known as its exclusive dealer arrangement (EDA).

This is a point that has rankled with one Haier boss who this week publicly pontificated his annoyance.

"There is no way they (Haier) are going to let this EDA lie," says Haier NZ managing director Ken Lilley.

"This is going to be right at the forefront of the (New Zealand-China) free-trade talks," he says.

Those words drew a slingshot-like response from Appliances' chief executive, John Bongard.

"I don't think it's us that they should be looking at but themselves and their own products as to why they can't get distribution elsewhere," he says.

"If they can't get people to stock their brands it's hardly our problem."

Correct, but Haier, which supplies 165 countries, may well grumble over Appliances' apparently rock-solid market position.

The Maytag - and associated brands - acquisition may see it looking to expand its distribution network in Europe and Australasia, where Appliances looms large.

First NZ Capital analyst Dwane Clark: "Medium term the deal could mean more competition for Fisher & Paykel, but in the shorter term I think Haier will have enough on their plate trying to turn Maytag around."

This is a point apparently not lost on Appliances, spokesman Brian Nowell saying any direct impact of the Haier-Maytag proposition is speculation.

"We certainly won't worry about it until we something happening as a direct result of the purchase," he says.

Appliances' EDA network doesn't extend to the US, where it may well be considered a whiteware David among many Goliaths.

"The competition from the likes of Haier, Sanyo, Mitsubishi and so on are substantial," says an Auckland-based analyst, commenting on condition of anonymity.

He, and Lim, think it unlikely Appliances will move some, or all, or its manufacturing plant offshore to cut costs.

"You get more benefit from manufacturing closer to your end market than you do manufacturing in a second country and selling in a third country," the Auckland analyst says, citing freight costs.

But, Appliances is a "nimble company, which is able to take risks and do things that larger companies aren't able to do," he says.

"They (Appliances) have a strong strategic tie up with Whirlpool so they don't have to compete with one another.

"I would say if there's going to be a takeover it's going to be by Whirlpool and if that was to be the case they would risk losing some of F & P's culture of innovation in the way they do business."

On this note, Lim, a long-time student of Appliances, says it is one of few New Zealand companies to venture into, and successfully operate in, the Australian market.

"The feeling that one gets is that they outgrew the Australian market much quicker than expected," he says.

Of course, it's still early days for Appliances' move into the US market, and Willis reckons it will be looking to eventually secure at least 50% of its revenue from there.

Why? Because earnings in the whiteware business are essentially seasonal, which means earnings are, to a certain extent, subject to volatility.

The move into the US market will hopefully smooth out that seasonality in Appliances' revenue and offer an earnings buffer that cannot be found in Australia.

"That's the risk for FPA in that both the New Zealand and Australian economies are slowing and we don't when, how far, and how deep and how long any slowdown is likely to be."

It was this that Appliances foreshadowed on issuing its March 2005 year profit, which was down 20% at $68.56 million.

Earnings in 2005/06 were likely to be comparable, Bongard said at the time, adding currency and raw material costs were factors in the just-passed year.

"Going out into the future, we don't see too much of an improvement in that area and we are expecting the New Zealand and Australian markets to slow," he said.

But that cooling off would be balanced by continued strong growth - sales volumes rose 70% in 2004/05 - in the US, he said.

Lim: "The US offers growth (prospects) as far as the eye can see and that's exciting for Appliances' future."

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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