We are looking past the minutiae of the 4Q22 result with eyes firmly planted on the prize of how much market share ResMed can grab while Phillips is sidelined. RMD has sorted out the early wobbles in supply chain and manufacturing and now has its destiny in its own hands, regardless of what competitors are doing.
RMD’s 4Q22 result demonstrated the company’s self-help initiatives to overcome a range of logistics and supply chain problems. The card-to-cloud solution was delivered on schedule and allowed the company to ramp sales significantly at the end of the period.
The quarterly result was impeded by FX, supply and freight issues although the latter two are easing. Improved component supply will enable FY23 device production to be higher than FY22. RMD is already gaining market share from the Phillips recall with an estimated US$60-70 million benefit in the June quarter.
In order to maximise the opportunity, RMD has stepped up its SG&A spending which reached US$195 million in 4Q22. This is the highest it has ever been, and the company is now guiding for SG&A costs to be 20-22% of revenue in FY23f. Spending on R&D will remain stable at 7-8% of revenue for FY23f.
RMD said: “Looking ahead, we are confident in our ability to grow steadily throughout fiscal year 2023”. We think this is a conservative statement as the early evidence suggests July and August volumes have been strong. Some price increases from July will also boost gross margins. Sales should accelerate in 2H23f as the company ramps up the manufacture of full function devices with alternative chips and the backlog begins to be addressed. The latter is possibly approaching half a year of supply of devices under normal conditions.
Investment view
RMD’s altruism for an undersupplied PAP industry is endearing. The redesigned AirSense 10 Card-to-Cloud device ostensibly has allowed RMD to “get many more patients into life-saving sleep apnea and respiratory care therapy”, according to CEO Mick Farrell. In conjunction with its clever new AirSense 11 cloud-connectable advanced platform, RMD is rushing to fill the void left by Phillips Electronics’ product recall which has left the market short of PAP devices and in so doing, (hopefully) permanently retain the market share gained.
After a shaky start, RMD has its hands firmly on the wheel after securing some supply chain workarounds. It now has a methodical path to ‘normality’ ahead. Management is expressing increasing confidence of incremental device sales in FY23f. Semantically, this is superior to the previous chant of targeting sequential quarterly sales growth, in our view.
The recovery to date has been US centric but RMD will be able to address the rest-of-the-world demand as capacity lifts in 2H23f.
Risk to investment view
The key risks to RMD earnings are from a change in demand, pricing, and costs. There is clinical risk, competition, technical innovation and change of practice factors to be considered.
Recommendation
We have retained our Buy recommendation.
Figure 1: RMD 4Q22 result
Figure 2: RMD 4Q22 revenue by product and region
