Breathing difficulties

4 Aug 2023

Sector: Health Care

RESULTS ANALYSIS

Need To Know

Gross margin expectations were mismanaged, contracting 30bps, vs expectations for an increase of ~100bps 'over the coming quarters'
Operating income slightly misses expectations at $307m vs $308m, although was still up 13%yoy
RMD had high expectations into this result, so a miss on margins will impact market sentiment and likely result in high single digit downgrades

Investment Implications

RMD's management may be experiencing breathing difficulties after providing a positive gross margin outlook at the 3Q result of "~100bps of improvement over the coming quarters" and subsequently delivering a 30bps decline in the 4Q result. The market had high expectations predicated on a lowering of input costs, in particular freight, as well as manufacturing output returning to normalised conditions. The result has hosed down the positive outlook and will likely lead to earnings downgrades.

Product mix up. The decrease in the gross margin was blamed on an unfavourable product mix, as devices (which are lower margin) continue to grow above masks (which are higher margin). Devices group revenue grew 24%yoy vs masks which grew 18%yoy in constant currency. Manufacturing and component costs continue to bite the gross margin, which we expected to abate, but the timeline for cost inflation to fall continues to be pushed out. Higher average selling prices helped, but was not enough to offset. SG&A costs also increased 26%yoy, and are up to 21.5% of revenue, compared with 21.1% in the prior year. The expenses are mainly related to increases in employees and incremental expenses associated with the MEDIFOX DAN acquisition.

Investment View

The result was clearly disappointing, especially in light of management's comments of gross margin improvement after the 3Q result in February. We expect downgrades and a negative price reaction. On a longer-term basis, RMD continues to have a market leading product and can still grow earnings in the high-teens over the medium term. The multiple may see some impact as well in the short-term, and there is potential for further de-rating.

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Stock Overview

Share Price

Company Overview

RMD is a medical device manufacturer treating sleep apnea, chronic obstructive pulmonary disease (COPD) and other chronic respiratory diseases. RMD’s products and platforms are designed for out-of-hospital use to support professionals and caregivers to help people live and recover at home.

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