Morningstar | ResMed’s Connected Devices Keep Everyone Hooked; Raising FVE to AUD 14.90 and USD 104.00. See Updated Analyst Note from 21 Jun 2019
We raise narrow-moat ResMed’s fair value estimate to USD 104 from USD 101 or AUD 14.90 from AUD 14.40 for the Australian listing. The increase is a function of tempering our medium-term sales forecasts offset by lowering our cost of equity assumption to below average based on a reassessment of the resilience and low systemic risk of the business. ResMed’s strategic direction of creating connected devices that allow patients, medical practitioners and payors to get both clinical and compliance data is key to our view the company will further entrench itself in the respiratory devices market. The connected respiratory device is taking on increased importance as reimbursement levels in France are linked to evidence of patient compliance. We expect this to spread to other geographies and currently only ResMed and key rival Philips have connected products. As such, we factor market share gains into our 8.4% five-year CAGR revenue growth assumption, ahead of estimated market growth of 6% to 7%.Large tax charges booked in 2018 create an artificially low earnings base and we forecast diluted EPS for fiscal 2019 at USD 3.26 up 6% on a normalized base of USD 3.07, which contrasts to the USD 2.21 reported 2018 EPS. Importantly there remains tax risk. While a provision has been raised for the USD 126 million to be paid across in the U.S. over the next eight years, only USD 75 million of the USD 260 million taxes and penalties claimed as due by the Australian authorities has been paid. ResMed has not raised a provision for Australian tax claimed and are further exposed to a back audit of the 2014 to 2017 tax years.
Our below consensus earnings take a different view on operating margins which we forecast to improve to 24.8% from versus the consensus expansion to 25.4% by fiscal 2021. Our view is based on a revenue mix shift away from the more profitable masks and accessories segment given the company’s focus on lower margin devices and software as a service acquisitions.
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