Sleep Soundly

ResMed posted fourth-quarter FY19 adjusted EPS of US95c, 7% ahead of Ord Minnett’s estimate and 3% ahead of consensus due mainly to lower selling, general and administration costs. The result saw group revenue rise, due largely to strong mask sales in the US. A dividend of US39c was declared for the quarter, just below our US40c forecast.


We note the following key items of interest at the result:


  • ResMed gained mask market share across the globe in the fourth quarter. In the US, the company saw 16% sales growth, which was supported by strong market growth due to rising rates of adherence and improved resupply programs. Outside the US, 12% growth was supported by new product launches, and previous fleet upgrades in France and Japan.


  • The company recorded 7% growth in continuous positive airway pressure (CPAP) device sales in the Americas, suggesting it at least held share. Encouragingly, ex-Americas device sales lifted by 1% in constant-currency terms despite challenging comparable numbers.


  • Growth in software-as-a-service revenues of 15% exceeded our forecast, supported by double-digit growth from MatrixCare. Based on our conversations with industry participants, we are confident ResMed has acquired a business that is well positioned to take advantage of a largely under-served marketplace. However, we note material further investment may be required to maximise the opportunity.


  • ResMed again saw a solid lift in organic operating leverage supported by strong top-line growth. We note the allocation of some costs to a below-the-line restructuring charge flatters this calculation, although the restructuring programs boost our confidence that there is potential for significant further margin expansion.


Despite the strong fourth-quarter result, we have made only modest revisions to our forecasts as the lift in operating earnings was offset by higher interest cost assumptions and an expansion in the expected time required to generate a profit from the Verily joint venture. Our discounted cash flow valuation has increased due to a reduction in the risk-free rate to better reflect the global interest rate environment, leading us to raise our target price to $18.00 from $16.50. We maintain our Hold recommendation.

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