ResMed Inc

About the author:

Derek Jellinek
Author name:
By Derek Jellinek
Job title:
Senior Analyst
Date posted:
24 January 2018, 9:42 AM
Sectors Covered:

Key points

  • 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.

More information

Morgans clients can login to view our detailed report and upgraded share price target for ResMed Inc (RMD). Alternatively, please contact your nearest Morgans office for access.

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.

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