EUR 850.00 For Business Accounts Only

Morningstar | Strong Sales Growth in Consumables Masks ResMed's Sluggish Device Sales. See Updated Analyst Note from 25 Jan 2019

We retain our USD 101 fair value estimate for narrow-moat-rated ResMed following the release of second-quarter results to December 2018. Strong momentum in mask sales continued from the first quarter, while device sales, particularly outside the Americas, disappointed. Although the strong sales growth in the firm's small software-as-a-service business was impressive, ResMed's earnings and moat are underpinned by its core sleep apnoea business, which enjoys switching costs and a commanding market share. With little change in the Australian dollar/U.S. dollar exchange rate, our fair value estimate for the Australian CDI remains AUD 14.20. After falling around 12% on the day of the announcement, shares in ResMed are now trading at levels we consider fairly valued.

The core devices business was sluggish, growing just 3% on the prior corresponding period on a constant-currency basis. In U.S., Canada, and Latin America devices, sales growth of 7% was offset by revenue declining in the rest of world markets, with France and Japan particularly challenged following digital health upgrade systems in those countries. Year-to-date sales growth in the segment of 8% tracks our unchanged estimate of 8% sales growth in fiscal 2019. Longer term, we expect ResMed can expand the devices business at a high-single-digit compound annual growth rate over the five years to 2023 as it increases its share of an unpenetrated and hence growing market.

The masks business increased revenue 10% on the prior corresponding period on a constant-currency basis, outpacing the lower-margin devices business. This favourable shift in product mix, along with manufacturing efficiencies, allowed ResMed to enjoy a 70-basis-point expansion in gross margin from 58.2% in the first quarter to 58.9% in the second quarter. We continue to expect masks to grow at a low-double-digit CAGR over the five years to fiscal 2023.

The recent USD 750 million acquisition of MatrixCare and USD 225 million acquisition of Propeller Health have pushed net debt to USD 1.05 billion, with ResMed suspending its share buyback programme accordingly. Nevertheless, the levels of debt remain comfortable. We forecast net debt/EBITDA of just over 0.7 for fiscal 2019, but falling back below fiscal 2018 levels of less than 0.15 over the next three years. The board declared a dividend of USD 37 cents per share, representing a 37% payout on non-GAAP EPS of USD 1.00.