Market Share Gains Key to ResMed’s Outlook

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Following FY22 results, brokers set higher price targets for ResMed on average and expect market share gains.

-Strong demand and competitor woes assist ResMed’s FY22 result
-Fourth quarter device revenue rises by 14% relative to the third quarter
-Brokers set higher 12-month price targets on average
-Ord Minnett downgrades on valuation and a delayed buyback

By Mark Woodruff

ResMed ((RMD)) can secure a ‘Cochlear-esque’ ((COH)) 70% market share of the global sleep market, given more strength in the US market, says Wilsons.

As a result of this view, following fourth quarter/FY22 results, Wilsons upgrades its rating for ResMed to Overweight from Market Weight and increases its target price to $38.75 from $30.71.

The fourth quarter was ahead of expectations, according to Morgans, with strong demand, competitor Philips’ device recall gains and price rises helping expand gross margins, though operating margins were flat on higher operating expenses.

Excluding covid-related ventilator sales in the previous corresponding period, fourth quarter device revenue rose by 6% year-on-year and increased by 14% relative to the third quarter.

Management noted a stable-to-improving supply chain environment and highlighted sufficient manufacturing capacity to increase output with improved component supply.

ResMed develops, manufactures and sells continuous positive air pressure (CPAP) devices for the treatment of sleep disordered breathing. Wilsons also notes the increasingly important software ecosystem offering that is wrapped around the company’s medical devices.

The broker, not one of the seven brokers updated daily in the FNArena database, notes the brisk introduction of card-to-cloud devices to counter the global chip shortage, and to take full advantage of Philip’s product recall woes.

Management estimates US$60-70m in incremental device revenue associated with the recall for the fourth quarter, which equates to total revenue of US$230-250m for FY22.

Brokers within the database generally approve of the latest results, and the average 12-month target price rises to $36.66 from $36.12, which suggests 7.3% upside to the latest share price.

While Ord Minnett likes management’s confidence that market gains will be held, even after Philips returns, the currently elevated share valuation leaves little room for error. In addition, the -US$1bn MEDIFOX DAN acquisition is thought to have pushed out a share buyback well into the future, and the broker downgrades its rating to Hold from Buy.

Citi also downgrades its rating to Neutral from Buy on valuation, despite upgrading EPS forecasts and expecting a permanent 10% market share gain in devices due to the Philips recall.

The broker notes the fourth quarter result was in line with consensus at both the revenue and earnings (EBIT) level, though 3.5% above consensus for EPS due to lower interest and tax expenses.

In further justification for its rating downgrade, Ord Minnett points to declining gross margins over the past two years resulting from a greater weighting towards lower margin devices and increased freight costs as a result of covid. However, the gross margin for the fourth quarter still managed a 50bps rise compared to the previous corresponding period.

Citi is less bleak on the outlook for margins, explaining FY22 was one of the rare years to see operating deleverage for ResMed due to supply chain challenges, the elevated freight costs and a focus for manufacturing upon output rather than optimisation.

More positively, Outperform-rated Macquarie points out new patients are now running at more than 100% of pre-pandemic levels in most countries, with available capacity for increased new patient diagnosis.

Citi also notes ResMed effectively doubled its device production capacity with the opening of its Singapore manufacturing facility.

The quarterly dividend of US44 cents was in line with Credit Suisse’s forecast and up 5% year-on-year.

Outlook

Management expects device sales growth sequentially in every quarter throughout FY23 on the “stable to improving supply chain environment”.

Also, while management proffered no guidance, higher costs are expected to be manageable due to the existing device surcharge combined with US price increases from July. Freight costs are also expected to continue to decline and provide some margin relief in the second half of FY23.

As semiconductor supply improves, Jarden expects rest-of-the-world device sales for Resmed should return to growth. However, it should be noted the card-to-cloud device solution is not as viable for some European jurisdictions, given reimbursement in these markets hinges on digital connectivity of CPAP devices.

The broker, not one of the seven updated daily in the FNArena database, maintains its Overweight rating and reduces its target to $34.83 from $35.47.

Goldman Sachs, also not one of the seven, retains its Buy rating and $34.40 target on an initial review of results, and expects the ability to capture market share from Philips will be key to stock price performance through the coming quarters. According to Morgan Stanley, Philips may not be able to compete for new patients for around 12 months.

Looking further out, Add-rated Morgans sees a multi-year opportunity for ResMed to grow at or above market and solidify its market leadership position.

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