ResMed: Result 2018
Recommendation
We freely admit it: ResMed had us nervous. Whether it was the uncompelling, left-field acquisitions, costs rising faster than revenue, or the loss of market share in continuous positive airway pressure (CPAP) masks, there's been plenty to fret about over the past few years.
One quarter at a time, however, the company has been regaining our confidence. The 2016 acquisition of Brightree has gone better than expected and now gives ResMed a more compelling ‘software-driven' CPAP offering. Margins have been improving for about 18 months, and CPAP device sales are growing faster than the market, so the company is at least increasing market share on that front. Though mask sales are still lacklustre, if push comes to shove, we prefer to see market share gains from devices because they lead to a long runway of future mask sales.
Key Points
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Good sales growth in all regions
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Average selling prices continue to fall
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Corporate cost cutting a mixed bag
The company's 2018 full-year result didn't disappoint. Revenue of US$2.3bn was up 13% on 2017, or 10% excluding the effect of currency fluctuations.
The best part is that revenue growth was due to good performance in all major regions as well as in each of the key product categories. There wasn't a single country or device keeping the ship afloat. Revenue from ResMed's software division, Brightree, was also up a hearty 12%.
Unfortunately, the company's gross margin was unchanged at 58%. Management said that cost cutting on the manufacturing side was offset by lower average selling prices across several product ranges. Mask prices, in particular, have been cut to remain competitive with the highly popular range released by Fisher & Paykel Healthcare. While the cost-cutting improvements are welcome, we're keen to see average selling prices stabilise because, without that, earnings growth will remain an uphill battle. There are only so many costs ResMed can cut before its factories are empty shells.
Stop wasting staples
Net profit fell 8% to $316m for the year, but that was muddied by a number of one-off factors, such as the impact of US tax reform, foreign tax credit adjustments, and the amortisation of intangible assets associated with recent acquisitions. Adjusting for these, underlying net profit actually rose 27% to $508m.
Year to 30 Jun | 2018 | 2017 | /(–) (%) |
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Revenue (US$m) | 2,340 | 2,067 | 13 |
EBIT (US$m) | 546 | 426 | 28 |
NPAT (US$m) | 316 | 342 | (8) |
EPS* (US cents) | 21.9 | 24.0 | (9) |
DPS* (US cents) | 14.2 | 13.4 | 6 |
Final dividend | 3.7 US cents, unfranked, (up 6%), ex date 16 Aug |
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*US cents per ASX-listed CDI |
A bit under half of the underlying increase was powered by growing sales, but the rest was due to management's tight grip on expenses. Selling, general and administrative expenses rose only 8% and, as a proportion of revenue, improved from 27% to 25%. ResMed's head office has never before been this lean.
Our feelings are mixed, though, when it comes to cost cutting in research and development (R&D). R&D spending increased 7% this year and now represents just 6.4% of revenue – the lowest it's been in 12 years. R&D isn't a run-of-the-mill office expense. It's better to consider research as an upfront investment in future growth, assuming it translates into a few cutting-edge product releases. Given declining prices and a strong product line-up from F&P Healthcare, research spending isn't something we want to see dwindle.
ResMed trades on a price-earnings ratio of 31. While revenues continue to grow and management is doing a good job of cutting fat from the business, we're wary of average selling prices continuing their downward trend and the pullback in research. Nonetheless, we're raising our price guide to reflect the growing business and efficiency improvements. HOLD.