Sonic Healthcare: 1H- in line- back in strong base business growth mode

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
17 February 2023, 6:30 AM
Sectors Covered:

  • Sonic Healthcare's (ASX:SHL) 1H underlying results were broadly inline, as slowing Covid-19 testing (-72%) impinged sales, compressed OPM and constrained OCF.
  • The base business (ex-Covid) continues to perform well, with margins at pre-covid levels, while Imaging is also improving, but Clinical Services was softer on lower Covid-19-related services.
  • Importantly, Jan-23 saw the base business revenue up 10% on pre-covid levels, with Australia Pathology jumping 16% on the back of strength in the specialist/hospital referral channels and post-COVID-19 catch-ups.
  • While the lack of FY23 guidance reflects some uncertainty, a recovering base business, along with an improving cost structure and ample liquidity for capital management and M&A, suggests momentum is moving in the right direction.
  • We have adjusted FY23-25 estimates and rolled forward valuation multiples, with our target price increasing to (login to view). Move to Add.


1H underlying results were broadly in line (EBITDA A$920m, -40%; Morgans A$929m) on revenues of A$4,082m (15% in cc; Morgans A$4,150m).

Operating margins contracted 9.9pp to 22.5%, cycling COVID-inflated an all-time high, with net margins falling 8pp to 9.4%.

OCF declined 25% to A$785m, but with cash conversion solid (116%) and still supporting a progressive dividend (+5%; A$0.42; 100% franked).

No FY23 guidance was provided.


Declining Covid-19 testing (-72%; A$379m) damped revenue growth across all geographies, with Australia/NZ sales down 27% (A$1,002), EU sales falling 16% (A$1,419m) and US sales declining 8% (A$1,079m).

Base business testing (ex-Covid-19) showed strength (A$3.7bn; +6% on pcp in cc; +8% vs 1HFY20 pre-pandemic), up organically least 5% across each market (ex-Switzerland, which was flat on Aug-22 fee cut), while Imaging also improved (A$388, +10%), unlike Covid-19-impaced Clinical Services (A$190m, -15%).

Base business margins are back to pre-pandemic levels, while momentum looks to be improving, with Jan-23 organic growth of 10% (vs Jan-20) and Australia Pathology strong (+16% vs Jan-20), with management noting market share gains, strength in the specialist and hospital referral channels, and post-pandemic catch-up testing (which they believe is only “just beginning”).

Opex continues to be right-sized, with automation and procurement savings helping both labour (% rev in line with pre-Covid-19 levels) and lower consumables. 

With a strong B/S (A$1.5bn headroom) and a “rich pipeline”, we expect M&A activity to heat up and expect an updated on its preferred bidder status for a large 15-year UK NHS laboratory contract.

Forecast and valuation update

We have lower FY23-25 Covid-19 testing and increased base business assumptions, resulting in changes to underlying earnings (-5.3%/+4.5%/+5%, respectively). 

FY23-25 earnings changes combined with rolling forward valuation multiples see our blended DCF and SOTP valuation-based target increase to (login to view).

Investment view

We believe SHL has turned the corner on the pandemic and is in a strong position, with solid base business growth and effective cost outs, along with Covid-19 testing (at some level) and ample liquidity for capital management and M&A.

Price catalysts

  • Trading updates.


  • Changes to Covid-19 and base business testing.
  • Margin adjustments.
  • Changes in the degree of competition.
  • Acquisition integration and synergy capture.
  • Regulatory intervention and market share gain/loss.

Find out more

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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