RMD FY26 result-- FY27 looks challenging but should be manageable

 RMD FY26

My Thoughts

The result was in line with my estimates, with revenues in line and NPAT 1% below. The result was strong, with 8% cc revenue growth and 290bp GM expansion, together with share buybacks resulting in 16% non-GAAP eps growth.

There was a noticeable change in tone and narrative in Q4 commentary. RMD has become a bit more cautious and defensive compared to the confidence displayed in the first three quarters. That leads to the question: why? The exit rates do not look as good as the extrapolating full-year momentum implies. There were also some negatives in Q4, which should be looked at.

The extent of the ventilator field action was disclosed as a $42m charge to repair infield ventilators and a $75m revenue headwind, as sales will cease until the full extent of the damage is known, at least a year. The management described the provisions as conservative. Although it appears very few devices are impaired, every one of them will have to be checked, is my read. Most likely this is a one-off. In the GM chart below, the difference between GAAP margins and non-GAAP margins is due to the charge.

There is a 9-12% short position in RMD, which is huge given the quality of the stock and most likely arises from GLP-1 fears with the widespread adoption of oral pills. RMD continued to state the data is supportive of a tailwind for CPAP devices. However, adherence in the cohort taking pills will likely be less than injectables, so corresponding positives into devices could be less as well. No negative impact so far.

There was much talk on awareness as a challenge, which has been an issue for a long time, but the rhetoric in Q4 was more direct. RMD mentioned that young people and women were becoming a greater proportion of the pipeline.

For the first time, RMD gave full-year guidance. Taken at face value, this may be due to the many moving parts going forward, or maybe not. The guidance was not hugely surprising but contained some issues. Revenue growth was 5-7% ex Matrixcare divestment and Noctrix acquisition. Adding the Astral revenues foregone would increase the growth rate by 130bp, back into long-term growth rate levels. A Non-Gaap eps guide was also given,  being $12-12.25, which includes no Matrixcare ($220m rev, $58m profit) and Noctrix dilution of 4-5%. Q4 saw gross margins come back for the first time in quite a while, and although they were forecast to rise to low double digits in FY27, Q127 is expected to be weaker as well. The main reason is that freight and component inflation is outstripping productivity growth. Pricing is expected to help margins going forward, and price increases were described as modest to cover some cost increases. The changes in pricing and inflation open the door to some uncertainty over the impact price increases will have on volumes. Operating margins are expected to increase slightly over the year. The guidance also includes the benefit of a $1.5b share buyback, which helps the eps number. All these taken together perhaps make a more uncertain outlook for RMD than we have seen in recent years.

Adding to the changes were a large step-up in capex and R&D. AirSense 11 was launched 5 years ago, and that is the usual RMD product cycle, so a new launch is due. RMD describes the extra spend as being for AI initiatives and new generation products. The capex guide of $160-180m is a step up but not huge.

Other items were that RCS is now mainly Medifox Dan and Brightree and is expected to grow HS digit going forward. The SGD/USD hedge is expected to generate $9m per quarter, which is offsetting interest expense but may not be of high quality. M&A was mentioned in the $100-500m range (tuck-in size) and focused on growing the funnel and adjacencies. Philips is due to re-enter the market at some stage, increasing uncertainty on how aggressive they will be on price to rebuild share.

SUMMARY and VALUATION

No doubt there are more moving parts for RMD at this stage and a bit more uncertainty. Of all of these, Philips' response and the trajectory of margins are perhaps of greatest impact. RMD remains in a very strong position to weather the changed environment, embedding its data and adherence support into its device network. It's not Apple, but much effort has gone into integrating the patients, doctors, suppliers, and insurers into an ecosystem.

Assuming a few headwinds but ultimately growth continues at 10% for 5y CAGR and a 23X exit rate gives a 16% return at $28.87. There may be some volatility as Philips enters the market and will probably be aggressive as there is little other choice, GLP-1 sentiment waxes and wanes, and the pricing/volumes trade-off will have to work itself out. The market is particularly sensitive to any GM deterioration, and this could happen over the next year or so until inflation settles. RMD remains a leader, with very strong quality metrics, in the market, and I will look to add to this middle-weighted stock if weakness persists. Although I acknowledge the more challenging environment, the challenges are unlikely to be thesis-destroying IMO; profits continue to grow, and the pricing of the stock is now quite reasonable.














 

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