4Q inline; GMs stable; op margins expanding; masks taking share
4Q adjusted earnings were broadly in line (NPAT US$136m, +24% vs Morgans US$135m), equating to EPS of US$0.95 (+23%; Morgans/consensus US$0.95). While favourable US tax reform helped support the bottom line (tax rate c15%), adjusted operating profit still increased 19% to US$166m, with margins up 162bp to 26.6%. Underlying cc revenue growth tracked above the market (+10%, US$623.6m), with strength continuing in the Brightree informatics platform (+12%, US$40.4m).
Product sales growth in the Americas (US$346.7m, +10%) and Rest Of World (ROW) (US$236.5m, +9% in cc) were solid, with mask and device sales in the former gaining market share (+12%, +9%, respectively), while in the latter, masks were the standout (+16% in cc) with devices tracking the market (+6% in cc). Adjusted GM was stable (-10bp yoy/qoq) at 58.1%, with normal ASP declines, partially offset by ongoing manufacturing/procurement efficiencies. OCF fell 8% to US$129.4m, impacted by several one-offs (US$7.5m restructuring; US$13 tax expense), but still supported a 6% dividend uplift (US$0.37).
Favourable reimbursement + mask resupply = expanding margins
While gains from favourable telemonitoring reimbursement changes for cloud connected devices across Japan and France appear to be tapering off, reimbursement has just commenced in South Korea and favourable CMS rule changes to competitive bidding support US device growth. Importantly, a growing installed base of connected devices and continued focus on resupply should bode well for continued strength in the high-margin mask/accessory category. In addition, the recent acquisition of cloud-based software and services provider HEALTHCAREfirst brings sales of cUS$30m in the fast-growing home health and hospice segments, along with numerous other product rollouts (eg QuietAir; AirFit N20 Classic; Mobi, RMD's first branded portable oxygen concentrator; and SleepQ smartphone diagnostic app in China), should see continued solid earnings growth and margin expansion.
Modest earnings changes
We have revised FY19-21 estimates, increasing our sales assumptions to mainly account for HEALTHCAREfirst, and lower opex in both SG&A and R&D lines, resulting in underlying profit increasing up to 4.3% by FY21.
Momentum looks set to continue
Although investors have reacted somewhat indifferently to a solid 4Q result, we see an expanding product pipeline, favourable reimbursement, stable pricing and moderating opex as all supportive of strong sales, continued operating leverage and a solid earnings trajectory reflected in an increase to our share price target (Morgans clients can log in to view).
We maintain our Add rating.
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