Sleep Soundly | ResMed (RMD) Recommendation

Ord Minnett Research Recommendation:   ResMed (ASX: RMD)  

Following the success of ResMed’s previous major device launch in 2014, Ord Minnett has reviewed its forecasts to reflect a more optimistic view of the likely boost from the newly announced AirSense 11 flow generator platform.

The original AirSense supported a 32% lift in US device sales. The very strong growth in FY15 was largely volume-driven with ResMed choosing to hold the price stable, despite offering a superior device. This reflected the challenging pricing environment after sharp reimbursement cuts under the Competitive Bidding program.

With a more benign reimbursement environment, ResMed may be able raise prices this time. The new device should also support gross margins as manufacturing volumes ramp up. In the short-term, however, sales are likely to stagnate as customers await the new offering, exacerbating the already tough COVID-19 comparable numbers. This should be offset partially by stronger ex-US sales given Philips’ DreamStation device has been withdrawn.

We have reduced our FY21 EPS forecast by 0.5% due to weaker sales ahead of the Airsense 11 launch, while we have lifted our estimates by 3% in FY22 and 6% in FY23. The EPS boost also reflects operating leverage post Airsense 11 launch costs, along with a modest increase in gross margin by FY23 as the manufacturing cost advantages of the new device are realised.

We see potential upside to consensus numbers and, with the stock trading well below our increased target price of $28.50 (from $26.50), we have upgraded our recommendation to Accumulate from Hold.