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Shortages Chip Away At ResMed’s Big Break

Australia | Mar 30 2022

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

ResMed struggles to realise the benefit promised by a major competitor recall and heightened demand amid a global shortage of semiconductor chips necessary for device production.

-ResMed has changed its tune on recovery of semiconductor chip supply in latest market update
-The company should be the major beneficiary of a competitor recall amid elevated demand
-Commentary leaves room for a downgrade to US$300-350m full year benefit guidance

By Danielle Austin

The potential benefit for ResMed ((RMD)) from a competitor recall has been a dangling carrot for investors for close to a year, but the company’s ability to meaningfully increase its supply of semiconductor chips is crucial to delivering on expectations. With Philips announcing a recall of its Respironics CPAP machines last June amid elevated global demand for CPAP devices to manage a 30% rise in sleep apnoea diagnoses, ResMed found itself perfectly placed to take advantage of heightened demand and limited competitor supply, but a global shortage of semiconductor chips has impacted on the company’s expected benefit.

The chip shortage has impacted ResMed’s ability to deliver devices to the market, and while market analysts largely continue to see potential for ResMed to benefit substantially from competitor and industry conditions, the payoff has become a waiting game for investors.

Sizeable market share gains remain ResMed’s for the taking if the company can secure an improved supply of chips. The company previously suggested it had obtained an improved outlook on chip supply with its second quarter results, but more recent updates have suggested this may have been optimistic.

Market experts anticipate the Russia-Ukraine conflict could further tighten the already short supply of chips, with Ukraine a large exporter of the neon gas required for manufacture.

Moves to improve supply leave market wanting

Steps were taken by ResMed to secure a de-risked chip supply, with the company pursuing the validation and verification of new suppliers. Company commentary from the second quarter result implied headwind was being made in securing new supplies, with the company suggesting quarter-on-quarter supply improvements could be expected through to the end of the financial year and extending into FY23.

In its most recent commentary the company has now suggested third quarter supply will be similar to that of the second quarter, and while some improvement continues to be anticipated for the final quarter of the financial year, it is likely minimal. A trend of chip suppliers rescinding on supply commitments, some paid for, extends further than ResMed and continues to impact medical device and electronics companies globally. Market analysts expect this line of commentary from the company allows room for ResMed to downgrade its previous expected full year benefit from Philips’ recall of US$300-350m.

The company has expanded its manufacturing capacity to address heightened global demand through the addition of a new plant in Singapore, but additional capacity has made little impact on the company’s device output without access to the necessary chips.

Extended impacts of recall offer further room for benefit

Philips, arguably ResMed’s biggest competitor, first announced the recall of its Respironics treatment in June 2021, and while the company initially guided to impacts of the recall extending to December 2022 it would appear impacts will spread beyond that.

Believing Philips has been slow to communicate the impacts of the recall to its customers, the FDA earlier this month increased pressure on the company to communicate more directly with its patients rather than relying on medical equipment suppliers. To date, 650,000 of an identified 2.6m impacted patients have received replacement machines, and market analysts expect the number of recalled devices could exceed the 5.2m initially estimated by Philips, particularly in the wake of the FDA’s mandate.

Philips is unlikely to be competitive in the new patient market until 2023, and with ResMed guiding to an improved supply of chips early in the next financial year and maintaining device supply will improve as a consequence, the company still stands to gain from a sales windfall in the first half if it can increase device supply to meet demand.

Of the two brokers in FNArena’s database coverage who have reported on ResMed’s chip supply backflip, two are Buy rated or equivalent and one is Accumulate rated, with an average target price of $37.80.

With the company guiding to third quarter sales being similar to second quarter, Ord Minnett notes a more than US$100m boost would be required in the June quarter for the company to make the bottom end of its revenue guidance, optimistic given ongoing challenges according to the broker. More positively, Ord Minnett analysts noted company commentary suggested it was not suffering capacity constraints, meaning an increase in chip supply should equate to a lift in production. The broker is Accumulate rated on ResMed with a target price of $37.00.

Macquarie highlighted the medium-term potential remaining for the company to secure market share gains, but reduced its expected full year revenue benefit to ResMed from the Philips recall to US$274m from US$333m. Macquarie is Outperform rated with a target price of $37.50.

Jarden, not an FNArena database broker, noted while ResMed has made every possible step to secure a better supply of semiconductor chips, clear outlook on supply is increasingly difficult as European geopolitics now come into play for suppliers. Jarden analysts continue to expect a sales surge for ResMed, but delays the expected benefit from the final quarter of FY22 into FY23, consequently downgrading net profit forecasts for the current financial year by -1.9%, but increasing net profit forecasts 1.7% and 0.4% respectively in FY23 and FY24.

Further, Jarden analysts believe the stock has already priced in a potential downgrade to the company’s retained full year recall benefit and maintain its target price decline is largely related to the strengthening Australian dollar. The broker is Overweight rated with a target price of 38.91.

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