Brokers Diverge On ResMed Outlook

This story features RESMED INC. For more info SHARE ANALYSIS: RMD

While all acknowledge robust earnings growth in the March quarter, brokers diverge on whether the outlook for ResMed justifies an outperform rating.

-Earnings supported by new products, operating leverage and hike in reimbursements
-Yet comparable growth likely to be stymied by competition and weighting towards flow generators
-Improving multi-year benefits from cloud-based devices
 

By Eva Brocklehurst

ResMed ((RMD)) kept up with market growth rates in the March quarter, while gross margins were flat as declines in average selling prices were offset by operating efficiencies.

Revenue and earnings were ahead of many estimates, revealing strong underlying demand and cost containment. Deutsche Bank notes, while Americas revenue growth did slow to 7% in the March quarter from 12% in the prior quarter, the company still achieved industry growth rates and did not lose share.

The broker expects growth in the Americas to be supported by the range of new products that are planned for launch over the next 12 months amid further penetration of cloud-connected devices. Deutsche Bank continues to rate the stock a Buy, given the positive earnings outlook.

Citi is in the fair valuation camp, believing the stock is reflecting top-line growth prospects, and the launch of new masks by competitors increases the risk that ResMed will not outpace market growth throughout FY19 in this high-margin segment. Masks account for around 37% of sales and around 50% of operating earnings (EBIT).

UBS suggests a slight slippage of gross margins in the March quarter was likely due to declines in average selling prices (ASP) and a weighting of sales growth to flow generators versus masks. Macquarie also envisages risks in relation to an acceleration of ASP declines because of reimbursement pressure and competition in FY19.

These factors are likely, along with a higher effective tax rate and the strength of growth recorded in FY18, to limit earnings growth. On the back of assessments of relative valuation the broker retains an Underperform rating.

Wilsons suggests the AirSense 10 product cycle is maturing and growth may now revert to an industry pace. The broker continues to revise down expense estimates as the "connected care" strategy lifts recurring revenue and takes out costs.

Ord Minnett was also impressed by cost controls that boost earnings forecasts and support guidance regarding further operating leverage.

Nevertheless, despite a more optimistic outlook, the broker is cautious that much of the potential is already reflected in the current price and retains a Hold rating. Wilsons, not one of the eight stockbrokers monitored daily on the FNArena database, also maintains a Hold rating with a $11.55 target.

Morgan Stanley expects a continuation of robust top-line growth that will be supported by a large installed base and driven by AirSense 10/F20 & N20 masks. The US reimbursement environment is also more stable and Brightree is insulating market share and improving resupply. The broker expects one more quarter of robust growth in masks of at least 10%.

Meanwhile, slightly above-market growth rates are expected in FY19 for US devices supported by the launch of QuietAir technology-enabled products. The broker tapers gross margin estimates to 58.9% in FY19 from 59.5%.

Credit Suisse does not envisaged ResMed growing at above-market rates in the short term as competitors launch masks in the US. The broker, on the other hand, believes ResMed has the opportunity to increase market share in the rest of the world, as several countries alter reimbursement schedules to favour telemetry-monitored devices.

The company recorded 18% sales growth in generators and 13% growth in masks outside of the US. The broker notes South Korea will soon begin reimbursing diagnosis and treatment for sleep apnoea which provides a high growth opportunity for ResMed albeit in a very small market.

France & Japan

Revenue was driven by an unexpected boost from Japan amid a favourable reimbursement change, several brokers point out.

Ord Minnett believes the company is well-positioned to build a dominant position in France and Japan, similar to what has occurred in the US since launching the AirSense range. The broker suggests other jurisdictions are likely to follow suit making it more confident in the outlook for the company's core sleep apnoea devices.

Morgans also has a strongly positive outlook, supported by strong international product sales and the strength in the connected care offerings. The broker also notes the "extraordinary" change in telemetry monitoring reimbursement in both Japan and France amid a move to more cloud-connected devices.

The broker remains comfortable with the improving outlook across both France and Japan as well as the multi-year benefit from cloud-based services. Moreover stable pricing and a full pipeline of mask products support increased estimates for FY18-20.

Citi suspects the strong devices growth in Japan and France is unlikely to be sustained for more than a year as, outside of the US, devices growth tends to be volatile. The broker also expects the new products being lined up for launch are likely to have a limited impact on earnings.

FNArena's database shows three Buy ratings, four Hold and one Sell (Macquarie). The consensus target is $13.30, suggesting 5.2% upside to the last share price. Targets range from $12.10 (Macquarie) to $14.36 (Morgans).

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