Are Headwinds Building For ResMed In FY27?

This story features RESMED INC.
For more info SHARE ANALYSIS: RMD
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

While one broker has turned more cautious on ResMed due to a one-off cost and risk of rising competition, analysts broadly welcome the MatrixCare sale as a strategic refocus backed by a sizeable shareholder return.

• ResMed’s remediation program clouds near-term earnings
• Citi has relegated the company to its lower-growth Healthcare basket
• MatrixCare sale sharpens strategic focus
• Share buybacks seen neutralising dilution from MatrixCare sale and Noctrix acquisition

By Mark Woodruff

Investors in healthcare devices and digital health solutions provider ResMed ((RMD)) may prefer to remain on the sidelines, suggests Citi’s latest research update on the company.

The reason: ResMed’s shorter-term growth outlook is clouded by the company now managing a remediation program for older portable ventilators while risk remains that key competitor Philips makes an earlier-than-expected return to the US sleep apnoea market.

More positively, following a strategic review of the company’s underperforming software business, management agreed to sell its MatrixCare business for around US$490m, with most of the proceeds to be returned to shareholders through an accelerated share repurchase program.

After four years of double-digit EPS increases, ResMed now ranks among the lower-growth stocks in Citi’s Healthcare coverage after the broker cut its forecasts to reflect a remediation program for Astral portable ventilators manufactured before October 2024, following the emergence of a component issue.

The price earnings (PE) multiple now assigned by the broker to its blended PE/ discounted cash flow (DCF) valuation falls to 13x from 15x given US peer multiples for comparable growth.

Citi has thus downgraded to Neutral from Buy with a revised price target of $34 versus $38.50 previously.

Most other brokers have Buy ratings with price targets ranging between $36.60 and $46.60.

MatrixCare

MatrixCare provides software to manage out-of-hospital care for aged care, skilled nursing, home health and hospice providers.

A press release accompanying the ASX announcement explained the transaction includes MatrixCare and related software offerings historically sold under the MatrixCare brand, including Healthcare First, Citus and home health and hospice solutions.

Macquarie explains MatrixCare’s end markets have faced structural headwinds from lower post-pandemic patient volumes and persistent staffing shortages, weighing on ResMed’s Residential Care Software (RCS) division.

Jarden views the divestment as an important signal that management is willing to recycle capital by divesting underperforming business units.

Following the sale, management expects to see the remaining SaaS portfolio re-accelerate back to high single digit top-line growth.

Morgans suggests the transaction also highlights management’s ongoing commitment to remaining assets in the RCS division, given the sale excluded Brightree and Medifox Dan, which both remain core software assets.

The company expects the streamlined SaaS portfolio to deliver high single-digit revenue growth in the near term.

Brightree provides management software for home medical equipment suppliers and sleep clinics. MedifoxDan serves the out-of-hospital care sector, helping customers manage clinical documentation and electronic patient records.

Listed on both the ASX and the Nasdaq in the US, ResMed conducts business in over 140 countries. The US is its largest market, but the company maintains significant operations across Europe, Asia-Pacific, and Latin America, often partnering with local healthcare providers to distribute its products.

Management also reiterated guidance for an FY26 gross operating margin in the range of 62%-63%, a selling, general, and administrative (SG&A) expenses-to-sales ratio of 19%-20%, and an R&D-to-sales ratio of 6%-7%.

Background to disposed assets and deployment of proceeds

HealthcareFirst, acquired in July 2018 for -US$126m, expanded ResMed’s presence in the home healthcare market by supporting the shift of seniors into lower-cost care settings, generating around US$29m in revenue in 2017.

MatrixCare, acquired four months later for -US$750m, broadened the group’s software offering into care management and electronic health records (EHR) for long-term care providers.

Apart from general corporate purposes, net proceeds from the disposal of these businesses will largely be returned to shareholders through an accelerated share repurchase program.

Morgans believes this should broadly offset the earnings dilution from the MatrixCare sale and the recently completed Noctrix acquisition.

Management indicated it expects to increase the buyback to more than US$200m per quarter in FY27.

Jarden adds the current low share price makes the buyback particularly accretive.

On a pro forma FY26 basis, Morgan Stanley estimates deploying the full US$490m of proceeds into a buyback would result in around -1% EPS dilution, despite an estimated -3% reduction in earnings (EBIT) and profit.

Morgans estimates the acquisition of medical device company Noctrix, which aims to treat restless legs syndrome, adds around US$30m in revenue but will dilute FY27 EPS by approximately -US20c, as per company management’s guidance.

Noctrix is now part of ResMed’s core Sleep and Breathing Health segment, which includes CPAP devices for obstructive sleep apnoea, masks and accessories, cloud-connected software and digital health platforms such as AirView and myAir, as well as devices for chronic obstructive pulmonary disease (COPD) and other respiratory conditions.

Outlook

Macquarie views the MatrixCare divestment as strategically sound, allowing ResMed to sharpen its focus and re-allocate capital to faster-growing core businesses.

Similarly, Ord Minnett views the disposal favourably, noting MatrixCare was complementary rather than core to ResMed’s sleep apnoea, respiratory care and residential care software businesses.

Following Citi’s downgrade, there remain four Buy ratings among daily covered brokers in the FNArena database and two Neutral/Holds.

UBS is yet to update its research for both the MatrixCare sale and remediation program.

While others may yet follow in Citi’s footsteps, current consensus EPS growth forecasts are for 16.5% in FY26, and 10.1% next year (FY27). That latter number remains under threat from an earlier return by Philips, as is often mentioned in analysts’ reports, and now also from additional remediation costs, judging from Citi’s update.

If Citi’s projections were to become the new consensus forecast, ResMed shares would be facing headwinds from downgrades to growth forecasts. The offset is the shares are already trading circa -19.5% below Citi’s revised price target, currently the lowest in the FNArena universe.

Outside daily coverage, Jarden last week lowered its target by -$2.50 to $40.20, retaining its Overweight rating, midway between Buy and Hold in the broker’s hierarchy.

Canaccord Genuity, whose research is yet to be refreshed, previously had a Buy rating and target of $44.50.

ResMed is scheduled to release its Q4 financial result on 7 August, Sydney time.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms