Across client portfolios that have elected the ‘Blend’ Australian equities option we will be purchasing ResMed. This is being funded by the sale of AGL Energy which was started today and subject to market volumes is expected to be completed tomorrow.

Purchase of ResMed (RMD)

ResMed is a leading developer, manufacturer and distributor of medical equipment for treating, diagnosing and managing sleep-disordered breathing (“SDB”) and other respiratory disorders.  The company operates in 100 countries via direct offices and a network of distributors.

SDB include disorders ranging in severity from snoring to obstructive sleep apnoea (“OSA”), the latter occurring when the airway temporarily collapses during sleep. Such events can occur several hundred times a night severely disrupting sleep and negatively impacting health.   It is estimated that globally around 100m people suffer from OSA with only around 10m receiving treatment.  With increasing awareness of the condition and associated risks, diagnosis of the untreated population is growing at 4-8% p.a.

We like ResMed because:

• It is the market leader in an industry that provides enormous quality of life and health benefits yet remains underdeveloped with scope for significant growth;
• An increasing base of installed flow generators results in ever increasing recurring sales of higher margin consumables used for therapy;
• The trend to increased home sleep testing (“HST”) leads to more sales of higher margin machines as HST produces a less accurate diagnosis thus requiring use of more expensive automatic machines;
• A strong balance sheet provides flexibility to inter-alia continue pursuing its emerging market growth strategy and/or buy back its own stock; and
• The launch of next-generation devices earlier this year are expected to help drive volume growth and margin expansion going forward.

Purchase of the shares are obviously not without risks which include:

• Competitors have shown a willingness to compete on price, sacrificing margins in pursuit of volume growth which has negatively impacted ResMed’s market share in th US; and
• US Medicare competitive bidding round 3 (CB3) may still be an issue with the future rates for CB3 due in 2016 unknown.

With a significant focus on ongoing R&D we believe that ResMed will retain its dominant market position and be a major beneficiary of the long-term volume growth story in the OSA market.

To fund the purchase we have sold AGL Energy because despite its relatively defensive earnings and solid dividend yield we believe it offers less growth potential during FY15.  While AGL Energy is very leveraged to rising wholesale electricity prices – especially post the purchase of MacGen – these remain subdued in both NSW and Victoria where demand in both states have recently hit record lows on a five-year view.  Given the existing electricity demand / supply imbalance, a near term rebound in prices is not anticipated.

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