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:
- 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.
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).
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).
While margin headwinds are expected to remain in the near term, we believe the overall fundamentals remain sound and the company is well positioned.
Philips AGM 10 May-22; FPH FY22 results 25 May-22.
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.
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