ResMed Inc: 2Q beat - solid sales performance across portfolio

About the author:

Author name:

By Dr Derek Jellinek

Job title:

Senior Analyst

Date posted:

30 January 2023, 7:30 AM

Sectors Covered:

Healthcare

• ResMed Inc's (ASX:RMD) 2Q was ahead of market expectations, with robust sales across all product lines, but with GM headwinds limiting robust operating leverage.
• While management is guiding for steady GPM, we see scope for upside, as the focus shifts from optimising product delivery to manufacturing efficiencies, improving mix, lower freight costs, and higher attributable Medifox Dan margins.
• Importantly, increased production and improving/more predictable supply constraints saw fully-connected S10 off allocation, increasing S11 volumes, and strong new patient setups, with management expecting to work through C2C inventory, and confident it can meet excess demand before YE23.
• We adjust FY23-25 forecasts, with our DCF/SOTP based target price increasing to (login to view). Add rating maintained.

Event

2Q earnings were above market expectations, with NPAT US$244m (+13%; consensus US$242m; albeit a tad below Morgans US$247m), equating to EPS of US$1.66 (+13%).

Revenue was solid (US$1,034m; +16%; +20% in cc; consensus US$995m), with SaaS sales (+18%; US$117m) benefiting from the Medifox Dan acquisition, with organic growth (+7%) gaining from the Home Medical Equipment channel.

Americas sleep/respiratory sales were the standout (+26%, US$615m), underpinned by strong device (+41%; help by card-to-cloud (C2C) and S10 off allocation) and mask sales (+11%), while ROW held its own despite ongoing supply constraints, limited C2C uptake and FX headwinds (US$302m; -2%; +8% in cc; device, +5% in cc; masks, +14% in cc).

GPM fell 80bp to 56.8% mainly on unfavourable FX and product mix, partially offset by increased price, while lower adjusted opex (+10%) saw only 30bp shaved off OPM (29.6%), but with profit growth still lagging revenue gains (+14%; US$306m).

Analysis

It was good to see solid performance across the entire product portfolio. Masks benefited from strong resupply and increased post-COVID awareness of hygiene and health, while growth in life and non-life support ventilation was solid.

CPAP devices gained on increased production and delivery of both card-to-cloud (C2C) devices (mainly in the US) and fully-connected S10 (off US allocation) and S11 devices (rollout going well) as supply chain constraints ease, with management expecting steady progress on meeting excess demand before YE23.

While 2Q leverage was lacking on softer GPM, we believe a focus shift from reliability of delivery to optimisation of productivity efficiencies, combined with falling freight costs, improving product mix and integration of higher-margin Medifox Dan services, should support increasing Op leverage.

We view RMD as increasingly well positioned as a leading SaaS provider of out of hospital care, with strong underlying sales momentum (+7%) expected to continue, and integration of German-based Medifox Dan (only 6 weeks in 2Q; EPS neutral) offering end-to-end software for nursing and HME customers in Germany.

Forecast and valuation update

FY23-25 earnings increase up to 1.1%, mainly on higher sales and lower Primasun JV loss, partially offset by slightly lower GPM and higher net interest expense associated with the Medifox Dan acquisition.

Our blended SOTP/DCF based target price increases to (login to view).

Investment view

We continue to believe the overall fundamentals remain sound and the company is well positioned, with margin headwinds expected to abate slowly.

Price catalysts

• Philips 4Q22, 30 Jan-23.
• FPH FY23, May-23.

Risks

• Lower-than-expected mask sales.
• Lower-than-expected rebound in sleep patient set-ups and gains from Philips’ recall.
• Execution around SaaS acquisitions.
• Pricing pressure.
• Market share loss.
• Increased competition.
• FX headwinds.

Find out more

You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.