Global Shift Toward Less Intrusive Sleep Apnea Therapies Will Drive Long-Term Device Demand

Catalysts

About SomnoMed

SomnoMed develops and manufactures oral appliance therapies and connected solutions for treating obstructive sleep apnea globally.

What are the underlying business or industry changes driving this perspective?

• Ongoing global underdiagnosis of obstructive sleep apnea, combined with rising consumer and clinician awareness, is supporting sustained double digit device adoption, which is intended to underpin multi year revenue growth.
• Growing preference for less intrusive alternatives to CPAP, amplified by broader attention on sleep health from GLP 1 weight loss therapies and new category entrants, is contributing to a shift toward oral appliances, which is expected to support higher volumes and improved operating leverage.
• Scaling of the high margin MAS device portfolio, supported by multiyear managed care contracts and tender wins in Europe and the United States, is intended to lift group gross margin above current blended levels and to expand EBITDA margins over time.
• Manufacturing expansion in the Philippines, coupled with process improvements that have cleared backlogs and shortened turnaround times, is expected to enable volume growth without a comparable increase in fixed costs, supporting further margin expansion and cash flow generation.
• Commercialization of Rest Assure, including upcoming U.S. clinical trials and an efficacy focused FDA submission, is intended to differentiate SomnoMed with data rich, connected devices that can potentially command premium pricing, deepen payer adoption and enhance earnings growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming SomnoMed's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.1% today to 4.6% in 3 years time.
• Analysts expect earnings to reach A$6.7 million (and earnings per share of A$0.03) by about December 2028, up from A$-3.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$11.8 million in earnings, and the most bearish expecting A$5.0 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 39.8x on those 2028 earnings, up from -49.9x today. This future PE is greater than the current PE for the AU Medical Equipment industry at 35.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The sharp 22% revenue growth in FY '25 was partly driven by one off backlog clearance and exceptional demand. Management has already signaled a return to more sustainable growth in FY '26, which could lead to slower top line expansion and pressure on revenue growth if underlying demand normalizes faster than expected.
• SomnoMed is investing heavily in Rest Assure and manufacturing expansion, with FY '26 CapEx guided materially higher. If the FDA efficacy trial, 510k submission or commercial uptake are delayed or underwhelm, those higher fixed costs could compress EBITDA margins and limit earnings growth.
• The U.S. market, currently the standout growth engine with 31% revenue growth, is experiencing swings and structural shifts. Any deterioration in reimbursement, GLP 1 driven treatment patterns or competitive dynamics could slow device volumes and weigh on group revenue and operating leverage.
• Significant manufacturing and capacity concentration in the Philippines, coupled with exploration of an additional site, increases execution and operational risk. Any disruption or cost overrun in scaling production could erode gross margins and reduce free cash flow generation over time.
• SomnoMed is deliberately accepting lower margins in its managed care services to drive a flywheel of higher device sales. If multiyear tenders or administrative costs do not deliver the expected volume uplift, the blended 60% gross margin and expanding EBITDA margin could stagnate or reverse, limiting future earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$1.0 for SomnoMed based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$144.7 million, earnings will come to A$6.7 million, and it would be trading on a PE ratio of 39.8x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$0.79, the analyst price target of A$1.0 is 20.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.