EUR 850.00 For Business Accounts Only

Morningstar | RMD Updated Star Rating from 06 Aug 2018

Narrow-moat ResMed delivered a strong final quarter with solid growth on all fronts and geographies despite falling slightly short of our expectations for the full year. Non-GAAP net income of USD 508 million on group revenue of USD 2.3 billion, was up 27% and 13% respectively, year on year, compared with our forecasts of USD 551 million and USD 2.3 billion. Nonetheless, mask sales impressed, growing at around 13%, in constant currency, in the fourth quarter and above market rates for the full year in both the United States and Rest of World, benefiting from the continuing strong demand of both the AirFit F20 full-face mask and AirFit N20 nasal mask. Devices also performed strongly to end the year up 8% year on year, in constant currency terms.

Following the result, we are raising our fair value estimate for ResMed to USD 100 per share from USD 94 previously after adjusting for guidance in research & development costs, or R&D, as a percentage of group revenue, time value of money, and factoring in the expected contribution of the recent HealthcareFirst acquisition into fiscal 2019 forecasts. Specifically, we have reduced R&D costs to 6% of group revenue from 6.5% previously. Our revised fair value estimate equates to AUD 13.50 per CDI based on an Australian dollar/U.S. dollar exchange rate of 0.74, up from AUD 12.00 per CDI previously. As such, we consider shares in ResMed at current levels as fully valued.

We think ResMed's cloud-connected suite of products remain well-positioned to compete in all developed markets given its value proposition to patients, clinicians, and payors. These products increase patient adherence, improve clinical outcomes and reduce costs of associated medical conditions to healthcare payors. As such, we expect continued double-digit growth in mask sales, supported by the following initiatives. First, the resupply program for home medical equipment suppliers that essentially reminds end customers to replace worn out masks on a timely basis, which should benefit from the Brightree patient management offering to hospices and homecare settings now enhanced by the recent HealthcareFirst bolt-on acquisition. Second, new quiet air diffuser technology, Quiet Air, used in the full-face mask in the U.S. Third, favourable changes in reimbursements in France, Japan, and South Korea.

Recent studies cited by management pegs the global prevalence of people with mild, moderate, or severe sleep apnoea at around 936 million. And with an estimated penetration of around 15%, coupled with a growing awareness of sleep apnoea and its associated medical conditions, we expect double-digit growth to continue and remain comfortable with our forecast for global mask sales to grow at a five-year annual CAGR of 10%. This compares with a five-year sales CAGR of 8% for devices.

Our long-term margin assumptions remain largely unchanged and have gross margins improving slightly to 58.8% by fiscal 2023 from 58.2% in fiscal 2018. This reflects typically declines in average selling prices offset by manufacturing and procurement efficiencies and does not include the impact of currency movements which remains a significant variable at both the top line and cost line.

ResMed's balance sheet remains solid with USD 189 million in cash on hand and well supported by ongoing strong cash flows from operations. Impressively, cash flow from operations in fiscal 2018 grew by 22% to USD 505 million with reported debt/adjusted EBITDA for the period ended at around 0.43 times, compared with around 2.29 times in fiscal 2016 following the sizable USD 800 million acquisition of Brightree. As such, we remain comfortable with management's ability to both support a dividend payout ratio of around 65% while also funding strategic acquisitions such as the cloud-enabled software provider company HealthcareFirst.