Market share gains key to ResMed’s outlook

This story features RESMED INC and other companies. For more information STOCK ANALYSIS: RMD

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

-Strong demand and competitor issues contribute to ResMed’s FY22 result
– Device revenue in the fourth quarter increased by 14% compared to the third quarter
-Brokers set higher 12-month price targets on average
-Ord Minnett downgrades on valuation and a delayed buyout

By Mark Woodruff

ResMed ((RMD)) can secure a 70% market share of the global sleep market, similar to Cochlear ((COH)), given the strength of the US market, Wilsons says.

As a result of this view, following Q4/FY22 results, Wilsons is raising its rating for ResMed to overweight relative to market weight and raising its target price to $38.75 from $30.71.

The fourth quarter was ahead of expectations, according to Morgans, with strong demand, device recall gains from competitor Philips and price increases helping to boost gross margins, although operating margins were flat. on higher operating expenses.

Excluding covid-related ventilator sales in the prior corresponding period, device revenue in the fourth quarter was up 6% year-over-year and 14% from the third quarter.

Management noted a stable to improving supply chain environment and highlighted sufficient manufacturing capacity to ramp up production with improved component sourcing.

ResMed develops, manufactures and sells continuous positive airway pressure (CPAP) devices for the treatment of sleep-disordered breathing. Wilsons also notes the growing software ecosystem offering that surrounds the company’s medical devices.

The broker, which is not one of the seven brokers updated daily in the FNArena database, notes the rapid introduction of cloud card devices to counter the global shortage of chips and to take full advantage of the Philip’s product recall issues.

Management estimates $60 million to $70 million in additional recall-related device revenue for the fourth quarter, equating to total revenue of $230 million to $250 million for FY22.

Database brokers generally agree with the latest results, and the 12-month average target price rises from $36.12 to $36.66, suggesting a 7.3% upside from the last trading price. ‘stock.

While Ord Minnett appreciates management’s confidence in sustaining market gains, even after Philips returns, the current stock valuation leaves little room for error. Additionally, the acquisition of MEDIFOX DAN -$1 billion would have pushed a stock buyback well into the future, and the broker is downgrading its rating to Hold from Buy.

Citi is also downgrading its rating to Neutral from Buy on valuation, despite the updated EPS guidance and expects a permanent 10% market share gain in appliances due to the Philips recall.

The broker notes that the fourth quarter result was in line with consensus on both the level of revenue and earnings (EBIT), although it was 3.5% higher than consensus for EPS due to lower expenses. interest and taxes.

To further justify its rating downgrade, Ord Minnett points to declining gross margins over the past two years resulting from a greater weighting towards low-margin devices and increased transportation costs due to covid. However, the gross margin for the fourth quarter still managed a 50 basis point increase compared to the previous corresponding period.

Citi is less gloomy on the margin outlook, explaining that Fiscal 22 was one of the few years to see operational deleveraging for ResMed due to supply chain challenges, high freight costs and l focus on manufacturing rather than optimization.

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

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

The quarterly dividend of 44 US cents was in line with Credit Suisse forecasts and up 5% year-on-year.

Outlook

Management expects sequential growth in device sales in each quarter through FY23 in a “stable to improved supply chain environment.”

Also, while management hasn’t provided any guidance, higher costs should be manageable due to the existing device surcharge combined with price increases in the US starting in July. Freight costs are also expected to continue to decline and provide some margin relief in the second half of FY23.

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

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

Goldman Sachs, also not in the seven, maintains its buy rating and target of $34.40 in an initial review of the results, and expects the ability to capture shares of Philips’ market will be key to share price performance over the coming quarters. According to Morgan Stanley, Philips may not be able to compete for new patients for about 12 months.

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

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