Ord Minnett Research Recommendation: ResMed (ASX: RMD)
Despite the ongoing supply challenges that have weighed on the December-quarter result, Ord Minnett expects FY22 to be a strong year for ResMed as it takes full advantage of its competitor’s product recall woes.
ResMed reported revenues of US$894m in the second quarter, in line with our forecast but 3% below consensus, which we attribute to a weaker boost from the Philips recall of US$45–55m, down from US$80–90m last quarter. Our channel checks indicate ResMed’s deliveries fell short of customer expectations late in the quarter due to both supply chain challenges (a shortage of key components) and increased freight times as the Christmas rush exacerbated the pandemic-induced challenges.
Operating costs for the quarter were 1% higher than we expected and the lower tax charge was offset by a negative mark-to-market adjustment for the group’s investments.
Management reported demand across most of its markets was nearly back to pre-pandemic levels. Even in the face of the Omicron wave, demand for health services and devices provided outside a hospital setting has largely normalised in most geographies.
We remain confident ResMed will be able to ramp up production in 2022 as chip and component deliveries increase. Management confirmed its ongoing efforts to diversify its component suppliers, which should support a material lift in output by the June quarter, allowing the group to lift device sales into the end of the year and quite likely continuing into FY23.
We have made only minimal changes to our forecasts, which include a 1% cut to our FY22 and a 2% increase in our FY23 EPS estimates.
Overall, the result was as expected with the share price weakness presenting a good opportunity, in our view. Philips will work hard to recover market share once the recall is dealt with, but we are confident ResMed has both the product range and sales force to ensure it holds onto material market share gains. Given this view, we have upgraded our recommendation to Buy from Hold and raised our target price to $37.90 from $36.00.
Walter Watson
RESEARCH EDITOR
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.