Beats on op income/NPAT, but top line is soft
2Q adjusted NPAT for ResMed Inc (RMD) of US$144.5m was ahead of Morgans and consensus expectations, equating to earnings per share of US$1.00. Adjusted Op increased 15% to US$181m, with margins up 165bp year on year to 27.8%.
However, revenue was softer than expected (US$651.1m, +8%, +9% in constant currency), impacted by the roll off of digital health upgrades in France and Japan. Adjusted Gross Margins expanded 60bp sequentially (58.9%) above guidance (58.1%), supported by the acquisition of MatrixCare (+30bp), and ongoing manufacturing/procurement efficiencies, but partially offset by 'normal' ASP declines.
Operating Cash Flow of US$129.5m supported c6% year on year dividend uplift (US$0.37).
US masks/devices solid; ROW devices slip
Despite cycling a tough 2Q18 sales comp (12.4% ex-Brightree), product sales growth in Americas was solid (US$358.5m, +9%), with a 7% increase in devices and 11% growth in masks. However, Rest of World (ROW) cc growth was soft (US$229.4m, +1%), as device growth declined 2%, negatively impacted by the completion of connected-care upgrades in France and Japan, contrasted against mask growth that put up a respectable 8%. Management expects France and Japan will be impacted through FY19 and then is targeting market to above market growth.
Acquisitions help IT platform
The Brightree informatics platform grew 63% to US$63.2m, supported by recent acquisitions of HEALTHCAREfirst (closed 1Q; for home health and hospice) and MatrixCare (closed Nov'18; for skilled nursing and senior living). Organic growth slowed to mid-to-high single digits, but should recover.
Stripping cA$3bn off the market cap is shortsighted and overdone
While slowing sales momentum for a growth stock is never a good sign, in this case it is not fundamentally driven (ie normalisation of vols in <2% of total sales geographies) and should be little cause for concern as patient growth remains solid and RMD continues to take share. While recent Brightree acquisitions are adding to costs, will take time to integrate and make ROI modelling challenging, the value proposition addresses leading healthcare concerns, with an expanding portfolio offering that continues to improve underlying profitability (+38%, margins +3pt over last two years).
We have made modest changes (up to approx. -3.5%) to our FY19-21 EBIT estimates. We continue to believe that RMD's leading connected care offering and stable pricing will support strong sales growth, operating leverage and a solid earnings trajectory.
We retain our Add recommendation.
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