Chill out and buy more massive opportunity for the long term now...

Chill out and buy more massive opportunity for the long term now

What's changed
We mark to market RMD’s hedge book for the March quarter. We expect a
modest hedge book gain, driven by the strengthening of the Australian
Dollar against the Euro. As with the December quarter the AUD has
depreciated significantly against the USD; however, RMD’s AUDUSD FX
hedge exposure through the P&L remains almost fully offset by balance
sheet hedging. Also, our recent channel checks suggest that RMD has
strengthened its market position in the US through longer-term
commitments in response to DMEs seeking greater certainty over their
input costs. We also believe the industry is seeing strong growth in some
of the higher value niche segments.
Implications
We believe RMD currently has strong momentum in local currency sales in
both the US and Rest of World, albeit that flow gens are likely to be
outpacing masks. FX headwinds will, however, drag on reported earnings
growth into FY16, in our view.
Valuation
We take the opportunity to incorporate recent updated FX forecasts from
the Goldman Sachs Macro team, in particular a materially stronger
USDEUR in FY16E. The resulting downgrades are partly offset by
improved revenue forecasts in US flow gens in FY16 and beyond. We also
incorporate a $2mn hedge book gain for 3Q15. Overall, we downgrade our
FY15-FY17 EPS assumptions by 0.2%-5.0%. We raise our 12-month price
target by 7% to A$9.20 (based on 22x 1-year forward P/E at spot FX,
unchanged) which reflects a lower AUD, higher US flow gen revenues, and
a roll-forward to FY17E metrics. There is no change to our Buy rating.