Sonic Healthcare: Strong FY22 start; COVID testing leverage evident
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 22 November 2021, 9:00 AM
- Sectors Covered:
- SHL provided a solid trading update for the first four months of FY22.
- Revenue increased 5% on pcp, while underlying earnings jumped 16% as margins expanded 310bp to 32.1%, an all-time high.
- The strong result was underpinned by continued growth in COVID-19 testing revenue (+9%), as well as ongoing resilience in the base business (+6%).
- While the pandemic continues to cause volatility, as reflective of no FY22 guidance, and COVID-19 testing is slowing, it is unlikely to disappear entirely, and we continue to see risk skewed to the upside, especially as the northern hemisphere enters winter.
- We have adjusted our FY22-24 estimates, with our target price increasing to (login to view). Add.
Concurrent with its AGM, SHL provided a trading update for the first four months of FY22 ending 31-Oct-21.
Compared to the pcp, revenue and underlying earnings increased 5% and 16%, respectively, with operating margins expanding 310bp to an all-time high of 32.1%.
The company continues to support governments, healthcare authorities and communities with COVID-19 pandemic control initiatives in its seven countries of operation.
The strong results were underpinned by ongoing COVID-19 PCR testing, with the company performing c36m tests to date, with Germany (c25% of total revenue) at record levels and associated revenue up 9%.
We estimate c6m COVID-19 PCR tests performed through 31-Oct, annualising to c18m (-40% vs FY21; -25% 2H21 vs 9m estimated 1H22).
Notably, it appears greater scale-efficiencies around COVID-19 testing across the company’s high fixed-cost base is accelerating profitability, as we estimate operating margins more than double the underlying pathology business.
Management expects “significant ongoing COVID-19 testing revenue into the foreseeable future”.
The company is also providing serology testing and, in some markets, COVID-19 whole genome sequencing to aid identification of variants.
In Australia, the company has provided >1m COVID-19 vaccinations through special purpose high volume hubs and its network of more than 200 medical centres.
SHL continues to provide essential non COVID-19 healthcare services despite the operational challenges posed by the pandemic, with base business revenue growing 6% on pcp and 4% versus the same period in FY20.
The underlying growth drivers for healthcare services remain unchanged.
Forecast and valuation update
We have adjusted COVID-19 testing estimates and margin assumptions, resulting in FY22-24 underlying earning increasing up to 16.9%.
Our blended DCF and SOTP valuation-based target increases to (login to view).
While COVID-19 uncertainty is likely to continue to cloud the near and medium term, we believe SHL remains in a strong position for continued organic growth and continued (albeit slowing) COVID-19 testing, against a fairly benign regulatory backdrop and with ample headroom (A$1.5bn) for additional growth opportunities.
Trading updates; 1HFY22 results 21 Feb-22.
Lower COVID-19 testing volumes, changes to base business testing, margin compression, changes in the degree of competition, slower acquisition integration and synergy capture, regulatory intervention and market share loss.
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