ResMed Inc: 4Q beat - the perfect storm (well, almost)

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
09 August 2021, 8:00 AM
Sectors Covered:
Healthcare

  • 4Q was better than expected, on recovering sleep patient flows and Philips’ device recall gains, despite GM contracting on unfavourable mix and higher costs.
  • Device/mask growth increased double-digits, with underlying gains (ex-COVID related sales) up 46%/16%, respectively, on “unprecedented” demand.
  • While near-term margin pressure is likely to remain, fundamentals are improving, with US$300-350m flagged in incremental gains from Philips’ device recall pointing to an improving medium term earnings outlook.
  • We have adjusted our FY22-23 forecasts materially higher and introduced FY24 estimates, with our DCF/SOTP based PT increasing to (login to view). Add maintained.

Event: 4Q revenue and profit ahead, but GMs and OCF softer

4Q adjusted earnings were better than expected, with adjusted NPAT of US$198.4m (+3% yoy; Morgans US$188m; consensus US$183m), equating to EPS of US$1.35 (+2% yoy; Morgans US$1.28; consensus US$1.29).

Revenue also beat at US$876.1m (14%; 10% in cc; Morgans US$781m; consensus US$789m), with solid organic growth (+21%; ex US$20m in COVIDrelated ventilators sales, US$125m on pcp), gains from Philips’ recall (US$60- 67m), and modest SaaS sales (+5%; US$95.8m) as expected.

Combined sleep/respiratory sales were mixed, with Americas up 18% (US$472.3m), powered by devices (+30%), with masks tracking the market (+5%), while ROW sales were modest (US$308m; +11%; +2% in cc), led by solid masks sales (+24% in cc), offset by a 6% fell in devices.

Adjusted GMs contracted 260bp to 57.3% (-230bp qoq), attributed to unfavourable product mix and higher manufacturing costs, while op margins gained 190bp (29.7%; albeit -180bp qoq) sending operating profit up 7% (US$260.4m). OCF fell 31% to US$226.5m, as increased WC offset gains in underlying earnings and the dividend was bumped up 8% (US$0.42).

Analysis: 10%+ recall share gain seems reasonable, but lots of unknowns

We believe elevated inventory levels entering the quarter proved serendipitous (3Q US$484m, +35%) to address demand, but now falling DSIs (-21% qoq), coupled with ongoing manufacturing challenges (eg logistical; higher raw materials; unfavourable mix), create near term supply challenges.

Minimal FY22 guidance was given (opex % revs: SG&A 20-22%; R&D c7%; tax 19-20%) but management noted “unsatisfied demand everywhere” and framed incremental gains from Philips recall at US$300-350m, which appears reasonable.

We estimate the recall gain is c40% of Philips’ sleep device revenue (cUS$780m), or c13% of its market share (assuming it holds 33% share of a US$2.3bn market).

That said, the sustainability of potential market share gains is difficult to game, given uncertainty around not only Philips’ response and more limited industry diagnosis capacity, not to mention potential reputational or quality issues, but also RMD’s ability to fully benefit from pent up demand as it needs to debottleneck global supply chains, with current sales “hand to mouth” and 2HFY22 weighted.

Forecast and valuation update

FY21-23 earnings adjusted materially (up to 18%) and introduced FY24 estimates.

We roll forward and increase (5%) our valuation multiples, viewing “unsatiated” demand as deserving of a premium to historic levels, with our blended SOTP/DCF based price target increasing to (login to view).

Investment view

While margin headwinds are expected to remain in the near term, we continue to believe the overall fundamentals remain sound and the company well positioned.

Price catalysts 

S11 launch by end 1QFY22. Investor day- 8- Sept. 2QFY22 results- Nov-22.

Risks 

Lower than expected mask sales; slower than expected rebound in sleep patient set-ups and gains from Philips’ recall; execution around SaaS acquisitions; pricing pressure; market share loss; increased competition; and FX headwinds.

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