ResMed Inc: 1Q beats – strong and balanced

About the author:

Derek Jellinek
Author name:
By Derek Jellinek
Job title:
Senior Analyst
Date posted:
28 October 2019, 11:25 AM
Sectors Covered:
Healthcare

  • 1Q showed strength across the board, with market beating growth in sleep and respiratory care, underpinned by flow generator connected device solutions and exceptional growth on the back of multiple new mask launches.
  • Operating leverage continued, with GMs expanding (+120bp to 59.5%), on accretive ehealth acquisitions, manufacturing and efficiencies/favourable product mix, with good cost control amplifying the uptick in OPM (+130bp to 28%).
  • We believe the sustainable value of RMD’s end-to-end digital health solutions is translating into gains across the core business, and remain confident in ongoing momentum.
  • We have adjusted our FY20-22 forecasts, and we maintain an Add rating. (Morgans clients can login to view detailed reports and price targets)

1Q shoots the lights out; op leverage continues

1Q adjusted earnings were ahead of our and consensus expectations (US$135.4m, +16%; Morgans US$113m; consensus US$115m), equating to EPS of US$0.93 (+15%; Morgans US$0.86; consensus US$0.87).

Revenue also surprised to the upside (US$681.1m, +16%, +17% in cc; Morgans US$662m; consensus US$661m), with the SaaS business putting up US$86.9m (prior US$47.5m), driving a 5.7% uplift in total revenue and comprising 12.8% of total sales.

GMs expanded 120bp to 59.5% (+20bp qoq) ahead of guidance (c59.3%), supported by ongoing manufacturing/procurement benefits, higher margin ehealth businesses and a favourable core product mix, partially offset by 'normal' price declines.

Adjusted op profit increased 22% to US$191m, with margins expanding 130bp to 28.0%. OCF of US$162m reflects strong underlying earnings and good WC management, supporting 5.4% yoy dividend uplift (US$0.39). 

Mask growth exceptional; ROW devices soft (as expected)

Despite cycling a strong 1Q18 sales comp (13% ex-Brightree), product sales growth in Americas was solid (US$370.3m +13.4%), with an 8% increase in devices and 19% growth in masks, supporting share gains off a portfolio that has seen four new products launched over the last 12 months.

ROW cc growth was also good (US$223.9m, +8% in cc) supported by exceptional mask growth (+19%), the strongest growth seen in more than eight years, with more modest device growth (+4% in cc) as continues to be negatively affected by the completion of connected-care upgrades in France and Japan. 

SaaS integration & optimisation; targeting dd growth exiting FY20 

Software as a service (SaaS) revenue grew 83% to US$86.9m, supported by recent acquisitions of Healthcarefirst (closed 1Q; for home health and hospice) and MatrixCare (closed Nov’18; for skilled nursing and senior living).

Brightree organic growth remained in the high single digit range.

Management remains confident in driving sustainable, low double-digit growth exiting FY20 via new module launches, new customer adds and price increases in the US$1.5bn out of hospital market.

Earnings changes; momentum set to continue

We have increased our FY20-22 adjusted NPAT estimates up to 6%.

While 1Q was exceptionally strong and unlikely to be repeated, we continue to see good momentum across RMD’s core business and evolving connected care offering.

Add maintained.

More information

Morgans clients can login to view our detailed report and revised share price target for ResMed Inc (RMD). Alternatively, please contact your Morgans adviser or 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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