ResMed Inc: 2Q miss - but confidence and line of sight improving

About the author:

Author name:

By Dr Derek Jellinek

Job title:

Senior Analyst

Date posted:

31 January 2022, 2:00 PM

Sectors Covered:

Healthcare

• ResMed Inc's (ASX:RMD) 2Q was softer than market expectations, with modest Philips’ device recall gains and GM contracting on supply chain constraints and higher freight costs.
• Nevertheless, product sales increased double digits on strong demand, recovering patient volumes, and continued resilience in mask resupply.
• While supply and variability of freight remain near-term headwinds, management is increasingly confident on the outlook, expecting accelerating industry growth (+50-100bp) for “quite some time” on a growing patient backlog, focus on respiratory care/hygiene, and adoption of digital health technologies.
• We have adjusted our FY22-24 forecasts, with our DCF/SOTP based target price decreasing slightly to (login to view). Add maintained.

Event

2Q earnings were below market expectations, with adjusted NPAT of US$216m (+5% yoy; consensus US$219m), but above our estimate (Morgans US$204m), equating to EPS of US$1.47 (+4% yoy; consensus US$1.50; Morgans US$1.39). 

Revenue was also softer than anticipated (US$895m; +12%; 13% in cc; Morgans US$915m; consensus US$927m), with gains from Philips’ recall a bit light (US$45- 55m; 1Q US$80-90m) and SaaS sales slightly better (+8%; US$99m) on continued growth in resupply and stabilising out-of-hospital patient flow.

Combined sleep/respiratory sales saw Americas up 14% (US$487m), underpinned by device (+19%) and mask sales (+9%), while ROW gained (US$316m; +10%; +12% in cc), with double-digit device (+13% in cc) and mask (+11% in cc) growth. 

GMs fell 230bp to 57.6% (but +40bp qoq), on higher freight and manufacturing costs, partially offset by favourable product mix, while operating margins declined 190bp (-29.9%; 120bp qoq), seeing profit growth below revenue (+5%; US$268m).

Analysis

Despite missing market expectations on an ongoing supply chain crisis and logistical headwinds, we view double-digit product growth as impressive. 

New patient flow is improving (85-100% of pre-COVID covid levels; some locations >100%), with ventilator demand at pre-COVID levels, US launched S11 all presold and “moving fast” and mask resupply solid, despite limited new patient setups.

Management maintained US$300-350m in incremental revenue from the Philips’ device recall, backend loaded (4Q estimate cUS$150m), viewing it as long-term sustainable share, given the stickiness of its digital health end-to-end platform. 

While 3Q is expected to remain challenging, management remains confident of a marked improvement in 4Q and beyond, given better line of sight into semiconductors (extended lead time on multiyear contracts and short cycle times) and multiple initiatives to help mitigate supply challenges, including focus on existing supplier, prioritising medical devices over other products, re-engineering supply chain for some device components and introduction of a temporary device surcharge (from Jan-22; US$12; EUR12) to help mitigate costs.

Management expects “incredible industry growth”, flagging a 50-100bp uptick, given the backlog on Philips’ device recall , increased demand in post-COVID world focused on respiratory car/hygiene, and adoption of digital health technologies.

Forecast and valuation update

FY21-24 earnings decline modestly (up to 0.6%) with lower sales and higher opex.

Our blended SOTP/DCF based target price decreases slightly to (login to view).

Investment view

While margin headwinds are expected to remain in the near term, we believe the overall fundamentals remain sound and the company is well positioned.

Price catalysts

Philips AGM 10 May-22; FPH FY22 results 25 May-22.

Risks

Lower-than-expected mask sales; slower-than-expected rebound in sleep patient set-ups and gains from Philips’ recall; execution around SaaS acquisitions; pricing pressure; market share loss; increased competition; and FX headwinds.

Find out more

Download full research note

You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

If you would like access or more information, please contact your adviser or nearest Morgans office.

Need access to our research?

You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team. 

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.