Sleep Opportunity | ResMed (RMD) Recommendation

Ord Minnett Research Recommendation: ResMed (ASX: RMD)  

A key rival of ResMed has recalled millions of its sleep apnoea machines, ventilators and other breathing devices due to possible health risks. In Ord Minnett’s view, ResMed has been gifted a rare opportunity to expand its already leading position in the sleep apnoea market.

The competitor is focused on repairing and replacing 3–4m devices, and its management has said it will be unable to serve new customers. This should allow ResMed to expand its market share, with the near-term opportunity potentially worth more than US$500m. We believe the opportunity is fairly equally weighted between the US and ex-US markets, as while the US market is larger this is offset by competition from the new DreamStation 2 device.

We had assumed ResMed would face a few quarters of soft device sales growth ahead of the full launch of its AirSense 11 device. The company will now be able to manage the rollout with an eye to maximising its market share, although this might be limited by its ability to supply. Based on finished goods inventories of US$335m at the end of the March quarter and allowing for a month of production in transit, we estimate ResMed has US$130–150m of devices inventory on hand, equivalent to US$170–200m of sales.

We estimate ResMed’s sales figures will improve a modest 5% above our previous forecasts due to the competitor’s product recall, offset somewhat by supply constraints. We expect the gains to be held in the medium term despite the expected recovery in the competitor’s ability to supply by the end of FY22. We have increased our EPS estimates by 2.5% in FY21 and 7.1% in FY22, reflecting higher revenues and limited changes to operating costs. We maintain our Accumulate recommendation and have raised our target price to $32.00 from $28.50.