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Brokers Awake To ResMed’s Potential

Australia | Jan 31 2022

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

Brokers remain positive on the outlook for ResMed due to a new product launch and the potential for both increased market share and the easing of supply chain pressures.

-Two brokers upgrade ratings for ResMed
-Limited impact on gross margins from supply chain effects
-Opportunities continue from the Philips recall
-A period of multi-quarter growth is expected

By Mark Woodruff

Brokers remain generally positive on sleep medical device maker ResMed ((RMD)) despite a second quarter profit that came in -1.3% below the consensus estimate. More positively, growth in US masks and software-as-a-service were above market expectations.

While management had already flagged lower US device revenues due to the ongoing supply chain issues around semiconductors, the impact was exacerbated by logistic problems. This forced the company to increase its reliance on air freight due to shipping bottlenecks and resulted in a -6.9% miss on the consensus revenue forecast.

After a share price retracement of around -20% from the $40 levels of September last year, both Goldman Sachs and Citi upgrade the company’s rating to Buy from Neutral.

Morgan Stanley, on the other hand, injects a note of caution. The broker only estimates 4% upside potential from its $33.10 price target, which was lowered from $37 after the results. It’s felt the bigger picture at present is around rising bond yields. In addition, the analyst believes gross margins are likely to remain suppressed due to higher freight costs, elevated component pricing and trend of product mix toward devices.

Nonetheless, even Morgan Stanley sees a positive from ongoing troubles at competitor Philips, after an increased number of affected devices was announced. The broker now estimates an additional six months will be needed to complete remediation around the recall. ResMed reported a US$45-55m benefit from the recall in the second quarter.

Gross margins

Gross margins fell to 57.6% from 59.9% in the previous corresponding quarter though there was sequential improvement from 57.2% in the first quarter.

Credit Suisse sees only a limited margin impact after the company implemented a freight surcharge on the first day of the calendar year and forecasts a reasonably steady FY22 margin of 57.5%.

On the other hand, Jarden’s earnings growth anticipates an ongoing improvement in growth margin. Numerous tailwinds are cited, including a price premium for the Airsense 11 product, and a lack of discounting for the Airsense 10.  

In addition, manufacturing efficiencies are expected to flow both from an increased focus upon the Airsense 11, and as overall supply chain issues resolve.

Philips recall

Based on recent disclosures around the recall, Jarden now expects Philips to be out of the market longer, at least until end of 2022.

However, Goldman Sachs points out the second quarter recall tailwind of US$45-55m was a sharp slowdown from the $80-90m in the first quarter. As a result, the estimated FY22 benefit is now $285m, which is below the guided range of US$300-350m. Nonetheless, the broker feels ResMed’s competitive position is likely to be durable beyond original expectations due to Philips extended travails.

If global supply chain conditions do ease over the third and fourth financial quarters, Wilsons sees a potential recall windfall for ResMed in the first half of FY23, much of which may be sustained into FY24. Philips’ repair and replace response is considered subscale now that impacted patients total 5.2 million.

Ord Minnett expects the company to cement its leadership position in the eyes of distributors, clinicians and patients, thereby ensuring a significant portion of the market share gains become permanent.

The Outlook

Jarden expects supply constraints will alleviate in line with management expectations and the company is set to benefit from a period of multi-quarter growth. This is expected to result from a backlog of new sleep diagnosis, as new patient flow in some regions is still not back to pre-covid levels.

Also, a boost is expected from Airsense 11, which is yet to be launched into the rest of the world (ROW) market and is believed to be priced 15% higher than the Airsense 10.

Finally, the analyst expects an alleviation in freight costs along with the additional protection of the freight surcharge from new freight charge implemented in January.

Meanwhile, ResMed is Macquarie’s preferred Healthcare exposure, with prospects for robust earnings growth over the medium-longer term from improved activity and market share gains. The broker also highlights upside from an increased uptake of digital health.

Overall, FNArena’s database has six broker ratings with five Buys and one Hold. The $38.30 suggests 19.5% upside to the last share price.

For those brokers not updated daily in the FNArena database, both Jarden and Wilsons have an Overweight rating and Goldman Sachs has a newly-minted Buy rating, as mentioned previously.

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