Company Overview: ResMed Inc. (ASX: RMD) provides new and advanced solutions to people in their homes. RMD facilitates people to stay out of the hospital, through its out-of-hospital software platform, thus allowing them to live a high-quality and healthier life. The company offers medical devices such as sleep devices, respiratory care devices, masks, etc., which can be connected over the cloud.

RMD Details

Focus on FY21 Key Numbers & Past Performance: The company remains on track to gain from the decent performance in the Software-as-a-Service ("SaaS") business, owing to increased demand for sleep and respiratory care devices, which instils investor optimism. The decent performance across high-growth markets is an added benefit. Owing to a number of acquisitions, including Brightree in 2016, HEALTHCAREfirst in 2018, and MatrixCare in 2018, the company’s operations now include out-of-hospital software platforms, which places RMD for future growth.

• Looking at the performance for the years covering FY17 – FY21, the company has reported a decent top-line CAGR of 11.5%, with FY17 and FY21 revenue amounting to ~US$2,066.7 million and ~US$3,196.8 million, respectively.
• Diluted EPS on CAGR basis for the above-mentioned period stood at 7.8%, with FY17 and FY21 EPS of ~US$2.40 per share and ~US$3.24 cents per share, respectively. Moreover, the company has maintained a continuous upward trend in paying dividend to its shareholders in all these five years.
• The strong result was driven by the ongoing improvement of core patient flow, robust demand for its sleep and respiratory care products, and solid growth in its software-as-a-service (SaaS) business and digital health solutions.

Past Performance from FY17 – FY21; Analysis by Kalkine Group

Limelight on Q3FY22 Results:

• Impressive Top & Bottom-Line Performance: In 3QFY22, net revenue increased 12% year over year to ~US$864.5 million, led by robust demand in the sleep & respiratory care segment and growth in the Home Health, Hospice, and home medical equipment segments. Diluted earnings per share came in at US$1.22 per share compared with the year-ago loss of US$0.54 per share, due to a higher revenue base.
• Operational Highlight: Gross profit in the quarter stood at US$491.2 million, up from US$447.3 million reported in the year-ago period, owing to favourable product mix and enhancement in average selling prices.
• Cash Update: The company exited the quarter with a cash balance of US$201.8 million, up from US$194.5 million at the end of 2QFY22. Cash flow from operating activities for the quarter stood at US$271.7 million, compared with a cash inflow of US$510.2 million in 3QFY21. The board declared a cash dividend of US$0.42 per share in 3QFY22, with a payment date of 16 June 2022.

3QFY22 Highlights; Analysis by Kalkine Group

Key Metrics: EBITDA margin for 3QFY22 stood at 32%, higher than the industry median figure of 15.2%. Debt-to-equity ratio stood at 0.21x in 3QFY22, compared to the industry median of 0.37x.

Liquidity Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 7.28% of the total shareholdings, while the top 4 constitutes the maximum holding. First Sentier Investors (Hong Kong) Limited and Vanguard Investments Australia Ltd. are holding a maximum stake in the company at 2.75% and 1.23%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:  

Key Risks; Analysis by Kalkine Group 

Outlook: The company aims to provide products, patient services, digital health technologies in association with its supply chain partners, providers, and physicians to deliver valuable patient care devices and outcomes. The company remains committed to its ongoing innovations in product development for the treatment of sleep apnea. Its long-term strategy includes a continued focus on assisting 250 million lives in 2025, owing to robust digital health technologies and end-market demand from patients. The rising implementation of the company’s software solutions, incorporating myAir for patients, AirView for physicians, and Brightree for HME providers, seems encouraging. Moreover, RMD enjoys geographical exposure, owing to higher investment and expansion in high-growth markets like China, South Korea, Brazil, India, and numerous countries in Eastern Europe.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~21.48% in the past six months. Currently, the stock has a 52-week high and low level of A$40.79 and A$26.32, respectively. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium compared to its peers, considering decent Q3 performance, acquisition synergies, geographical diversification, etc. For the purpose of valuation, peers such as Cochlear Ltd (ASX: COH), Fisher & Paykel Healthcare Corporation Ltd (ASX: FPH), and others have been considered. Taking into account the aforesaid fact, growth in net revenue, robust demand for RMD’s devices, growth in HME segment, normalising patient flow in home care settings, current trading levels, and indicative upside in the valuation, we recommend a “Buy” rating on the stock at the closing market price of A$27.63, down by ~0.468% as on 25 May 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

RMD Daily Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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