RMD is a classic example of how short-termist broking analysts...

RMD is a classic example of how short-termist broking analysts can be.

Maybe it's because RMD reports quarterly that analysts are overly preoccupied with the minutae of quarterly events, thereby losing complete sight of the company's shareholder value creation attibutes for many years.

To wit:

• RMD’s financial prowess is almost peerless: over the past fifteen years the company has grown Revenues, EBITDA and NPAT at CAGRs of 21%, 25% and 29% pa without any recourse whatsoever to shareholders. RMD has just recorded something like its 74th record quarterly profit result.

• A feature of the company’s financial pedigree is GP Margins that have been consistency above 60% over an extended period, and high levels of surplus capital generation, with OCF covering capex five-fold. This is despite RMD’s operational currency, the A$, up over 50% over that period.

• The company’s balance sheet is in fine fettle, with a current ratio exceeding 5 times due to cash of some $800m, and negligible intangibles carried. Borrowings of $250m are equivalent to less than 12 months’ free cash flow, pre-dividends. Notably, RMD has bought back some $750m in its own stock ever the past decade.


But the ongoing “investment story” for RMD over the next few years will be developments in the US that I believe will present a period of accelerating growth for the company, with scope for recurrent exceeded on consensus expectations (in other words, more outcomes like last Friday’s result).


The drivers of my thesis of accelerating growth are:

• Ongoing evolution of home sleep testing (HST) in US over next 12 months. After resisting for many years, sleep lab operators are capitulating, with 30% of tests now done in the home. For context, in 2012 90k HST’s were conducted, compared to 40k in FY11 and 20k in FY10. Auto-titrating flow generators are exclusively used for HST, with the attendant GP margin uplift. We saw this already lifting RMD’s GP margin in the most recent result, when it was the highest since 2007.

• OSA has just been included on the approved disability list for US war veterans. This “new market” offers over 5m diagnoses.

• US National Transport Safety Authority moving to compel 3m interstate truck drivers to undergo OSA tests. Sample testing indicates that 35% of this professional demographic have severe OSA.

• OSA and Cardiovascular Disease trial: RMD has invested $80m so far. Definitive results expected in 2014. This doesn’t excite me too much, representing the sort of “blue-sky” chatter for which I am disinclined to accord any value.

NOTE: There is one potential negative event looming for RMD in the US market about which one needs to be sensitised: Durable Medical Equipment (DME) companies could face up to 30% cut to revenues on certain medical devices. Pressure will arise to pass on these cuts to suppliers. However, given the concentrated industry structure at the manufacturing end (viz. RMD and Phillips’ Respironics together representing some 75% of the North American market), I suspect the impact on margins will be modest, and that the only thing that we will see is some sticker shock to RMD’s stock price on the days following the official news of the cuts to DMEs. But I expect that in the fullness of time this will merely end up being a little squiggle on the RMD share price chare and I don’t think I am never good at catching little squiggles like that.

So I don’t believe it is too late at all to buy RMD.

Of courses, it all depends on one’s investment time horizon.

Arithmetically, the longer the investment timeframe the less important the purchase price becomes as a determinant of how the resulting wealth creation.

It stands to reason that fast-growth, if sustained, will quickly reduced valuation multiples.

And 12x EV/EBITDA for a company growing its bottom-line at circa 25% pa for the next few years (assuming my foresights prove accurate) looks undervalued to me.

Especially seen against RMD’s pristine balance sheet, its highly-competent management with proven understanding of industry drivers, compititive dynamics, R&D investment leadership and shareholder value creation, and the backdrop of a market of increasing un-met need.


The temptation of the pun is too tempting to resist:
RMD is a sleep-easy investment that will go on creating value for its shareholders for years to come.


Cam