Sleep Leaders

ResMed delivered a strong first-quarter FY19 net profit of US$166.3m, up 23% on the same period last year, supported by stronger than forecast revenue growth – 3.5% above our forecast – and another solid lift in the operating margin. The 23% lift in net income was achieved despite a well-telegraphed rise in the tax rate. A dividend of US37c per share was declared, as expected.

 

We make the following observations:

 

  • Devices – ResMed’s devices are increasingly becoming the default choice for US durable medical equipment users. This reflects the group’s efforts to build on its early success with its connected care strategy by offering a constantly improving software offering.
  • Masks – We are confident ResMed has fully recovered its position as the leading mask company after five quarters of double-digit growth. We see potential for mask sales outside the US to continue to grow, supported by improved resupply support and the group’s expanding share of devices.

The result boosted our confidence that ResMed is building an unassailable lead in its core sleep market. We have increased our earnings estimates to reflect the company’s attractive growth opportunities. The company’s growing dominance in the US market is a strong endorsement of the investment in Brightree and connected care, and opens the door for similar opportunities in other key markets, in our view.

 

Separately, ResMed has agreed to acquire privately held US health software company MatrixCare as it seeks to build a position as a leading provider of software to the highly fragmented out-of-hospital-care market.

 

MatrixCare is the #2 player in the long-term post-acute care software market, servicing more than 15,000 providers across the sector which includes homecare, unassisted senior living, assisted senior living and skilled nursing.

 

We are cautious that ResMed has paid a high price for the business, at US$750m, although the success of the Brightree acquisition is evidence that the company is ahead of the market with its software-as-a-service strategy.

 

Despite the attractive outlook for ResMed, we are cautious it is largely reflected in the current share price, especially in an environment where high-P/E stocks are under pressure. At current share price levels the stock is still trading at a 60% premium in P/E terms to the S&P 500 Index, well above the historical average of 30%. We maintain our Hold recommendation and recently raised our target price to $15.30 from $15.20.

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