Australia | Nov 02 2020
This story features RESMED INC. For more info SHARE ANALYSIS: RMD
ResMed has plenty of irons in the fire, well placed to grow from increases in home health care despite the likelihood ventilator sales will decline rapidly from the peak during the pandemic.
-Material contribution from upgrades/replacements
-Home sleep testing growing in prominence
-US reimbursement rates to remain stable
By Eva Brocklehurst
Ventilator sales in the first quarter offset any weakness in the sleep business for ResMed ((RMD)), yet the former is expected to decline rapidly now that the pandemic appears to have passed peak hospitalisations.
Despite the rising cases of coronavirus in the northern hemisphere and the reintroduction of lockdowns, management is confident of a sequential quarterly improvement in its device sales.
While the increase in the incidence of coronavirus has potential to curb non-urgent medical procedures, including laboratory sleep testing, UBS assesses current rates of hospitalisation are below levels experienced in March/June.
Hence, the impact on obstructive sleep apnoea (OSA) diagnosis may end up being minimal. Moreover, a resurgence of symptoms associated with coronavirus infection still could drive a longer tail for ventilator sales.
US sleep laboratories are currently back up to around 70% of pre-pandemic capacity while Germany is at 85-90% and China is back up to 70%. In the first quarter revenue was up 10%, ahead of most expectations.
Credit Suisse believes ResMed is uniquely placed to benefit from the move to home health care, as it has increasingly invested in out-of-hospital platforms over the past five years. Despite the strength in the shares, the broker still envisages upside and upgrades to Outperform from Neutral.
Credit Suisse forecasts 2% US device sales growth for the second quarter, assuming no benefit from ventilators. The broker assesses ResMed is gaining share and benefiting from its broad product portfolio while UBS calculates ResMed will reach a net cash position in FY22 and this will provide flexibility for capital management, either a higher dividend and/or reactivation of the buyback.
First quarter results were well ahead of estimates and the broker assesses sleep-related sales are recovering faster than previously expected. A strong revenue performance is expected over the longer term and UBS, too, upgrades to Buy from Neutral.
Earnings in the quarter were supported by strong mask sales and costs that were below guidance. There was a US$40m ventilator benefit attributed to the pandemic while the base sleep business showed sequential improvement. Goldman Sachs suggests the market was cautious about a recovery in new OSA diagnoses and management has acknowledged that in-patient rates are still down in most markets.
Hence, on first blush it appeared pandemic-related ventilator sales contributed meaningfully in the quarter, but management has indicated strength in devices was actually a bigger portion. This suggests to the broker there was an unusually material contribution from hardware upgrades and replacements to existing customers. Also, home sleep testing is growing in prominence.
This is likely to be an "increasingly interesting" dynamic to monitor, Goldman Sachs asserts, as it has the potential to improve longer-term penetration by reducing barriers to adoption. However, the challenge is weighing what looks to be a sharp tapering of ventilator demand through coming quarters, clearly subject to a wide degree of uncertainty around the progression of coronavirus.
Relative to the sector and the company's history, valuation is also a challenge for the broker Given the extent of the outperformance, and while the outlook for FY22 and beyond is intact, Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, still envisages a more attractive risk/reward elsewhere.
While emphasising the positives regarding longer term fundamentals, the broker retains a Neutral rating with a $28.50 target. While the company may be exiting the pandemic in a stronger position, Morgan Stanley agrees this is encapsulated in the outperformance of the stock over the year to date.
Still, the long-term prospects of the business not only remain intact, the broker concedes, but could be enhanced by accelerated adoption of remote patient monitoring such as Propeller Health.
Meanwhile, the US has removed the competitive bidding risk for ResMed as sleep and oxygen are not included in the 2021 product categories. This means the current reimbursement rates will remain for at least three years, supporting industry growth.
UBS asserts increased frequency of masks/accessories supply is contingent on current reimbursement methodologies. Mask and resupply sales associated with OSA have remains solid in the US and UBS assumes stable operating margins for the three profitable software-as-a-service businesses, and break even for Propeller Health/Verily, with a return on invested capital of 6.8% by FY23.
As the reimbursement risk is largely removed, Macquarie upgrades to Neutral from Underperform and expects sequential improvement in device volumes over the balance of FY21 amid ongoing opportunities in relation to resupply.
Elevated R&D and a solid inventory build were signs for Wilsons that the company's strategic plans have recommenced, such as software-as-a-service integration, device-level innovation in respiratory care.
These were on hold through the acute phase of the pandemic. The broker assesses the cost structure in the core business is now lighter, as the company has been an active participant in virtual conferencing and trade show activity. Wilsons, also not one of the seven, maintains an Overweight rating with a $30.50 target.
FNArena's database has three Buy ratings, three Hold and one Sell (Ord Minnett). The consensus target is $27.48, suggesting -1.6% downside to the last share price.
See also, The Focus For ResMed Returns To Sleep on August 7 2020.
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