- ResMed Inc (RMD) posted solid 2Q results highlighting growth in masks and devices across all geographies. The connected care Brightree acquisition continues to be an important growth driver going forward.
- The only blemishes were lower average selling prices and one-off tax adjustments which clouded an otherwise strong result.
- We have made upgrades to our forecasts which have resulted in a higher valuation and price target. Consensus upgrades are likely to follow.
- Although the share price rallied strongly yesterday we maintain a positive stance as earnings growth will come through further manufacturing and operational efficiencies and an increasing contribution from the SaaS business (Brightree).
2Q sales solid – mask and device strength across all regions
2Q adjusted earnings (non GAAP) was ahead of our expectations and consensus (NPAT US$139.8m, +39.0% vs Morgans' US$108.9m). A one-off tax adjustment was recorded of US$126.6m mainly related to a transition tax on unremitted foreign earners. Although this clouded the result the net benefit is positive over the medium term.
Adjusted non-GAAP earnings per share was US$0.83 compared with our forecast of US$0.76. Revenue surprised, coming in above expecations (US$601.3m, +11% in cc vs Morgans estimate US$543m), on improved patient volumes, with the underlying business (ex-Brightree) putting up market leading growth (+11.0% in cc) and ongoing strength in the Brightree informatics platform (+14% to US$38.7m, +13% organic).
The Americas and ROW (rest of world) (US$234.2m, +8% in cc) moved higher due to stellar mask growth (+12% Americas, +16% ROW) and devices remained strong (+12% Americas, +5% ROW).
Adjusted gross margin was lower by 10bp quarter on quarter to 58.2% which was below guidance of c58.4%. The weaker margin resulted from declines in average selling prices which were partially offset by manufacturing and procurement efficiencies. Operating cash flow improved by 9.7% to US$226.5m for the six months.
A quarterly dividend of US$0.35 was declared.
Upgrades to profit forecasts
We have revised our FY18-20 estimates, increasing our sales forecast which results in NPAT increases of 5.2% in FY18, 1.8% in FY19 and 1.7% in FY20.
Investment view – maintaining our positive stance
As a result of changes to our forecasts we have increased our valuation and share price target. The key risks for RMD include greater pricing pressure than expected and currency headwinds. We believe the leverage from the improved cost base and further market share gains are likely to grow earnings.
We maintain our Add recommendation.
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