Expanded Product Offering Underpins ResMed

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

Robust US economic conditions in FY19 should support ResMed amid stable pricing and an expanding product pipeline.

-Earnings supported by growing awareness of OSA and market penetration
-Competitor mask launches in FY19 may limit market share gains
-HEALTHCAREfirst could provide extra opportunities in medium-term
 

By Eva Brocklehurst

Users of ResMed ((RMD)) products and services are increasingly connected to the cloud and this is boosting market share and the company's bottom line. ResMed has also acquired cloud-based HEALTHCAREfirst, which will provide sales of around US$30m from the fast-growing home health and hospice segments.

Ord Minnett was encouraged by the composition of the FY18 result, in particular the strong mask sales which highlight the strength of the offering and a probable pick-up in demand. The broker attributes this to improved US economic conditions and the boost from the company's investment in resupply infrastructure over the past couple of years.

US tax reform helped support the company's bottom line and adjusted operating profit increased 19%. Product sales growth in the Americas was firm, with mask and device sales gaining market share. Masks stood out in the rest of the business globally (RoW), up 16% on a constant currency basis. Devices tracked the market in these regions, up 6%.

The main positives Deutsche Bank observed in the results were good recovery in the Americas, strong global growth in masks & accessories and better cost guidance for FY19. Earnings are seen supported by a growing awareness of obstructive sleep apnoea and penetration of both existing and new markets.

Credit Suisse agrees the strength in the US market, where ResMed has gained share in both masks and devices, is because of increased awareness of the company's cloud-connected offering.

Competitor Launches

Nevertheless, the broker is cautious because competitors are about to launch new masks and the company is not likely to gain share in the short term.

Beyond the second half of FY19, Citi also expects masks growth will decelerate towards market growth rates as the mature phase of the product life cycle is met by competitors launching new masks.

Morgans notes investors have reacted indifferently to what was a solid FY18 result but there is an expanding product pipeline, favourable reimbursement and stable pricing that should support operating leverage and the earnings trajectory. Hence, the broker believes the stock should trade at a premium to its long-term average and maintains an Add rating.

The company has benefited from changes to CPAP reimbursement schedules in France and Japan where existing users are being upgraded to cloud-connected devices. This is likely to become a headwind in FY19 and Credit Suisse estimates RoW generator sales growth will soften to around 4%.

South Korea is only beginning to reimburse the treatment of sleep apnoea and, while this is a high growth opportunity, the broker believes there will the only marginal benefit for FY19 earnings.

Credit Suisse believes risks are currently balanced for ResMed, as headwinds from generator growth in RoW and competitive product launches are offset by the delay to US competitive bidding and increased global penetration of cloud-connected devices.

Morgan Stanley, on the other hand, expects the market will focus less on RoW devices and more on resupply channels and ongoing operating leverage.

UBS makes minor alterations to operating assumptions. Gross margin was 58.1% and slightly below forecasts. The broker suggests the company's approach to resupply is resonating with durable medical equipment distributors (DMEs), translating to robust growth in masks and accessories. The recent broadening of the Brightree offering is also expected to support the trend.

HEALTHCAREfirst

The HEALTHCAREfirst acquisition, which is an electronic health record and billing software for home care and hospice providers, continues to expand on the Brightree software-as-a-service offering outside of the core DME segment.

UBS believes this could provide extra opportunities over the medium to longer term. Morgans increases sales assumptions to account for the HEALTHCAREfirst acquisition and lower operating expenditure and R&D.

FNArena's database shows three Buy ratings, four Hold and one Sell (Macquarie, yet to update on the result). The consensus target is $14.22, signalling -0.4% downside versus the last share price. Targets range from $12.10 (Macquarie) to $16.41 (Morgans).

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