Sonic Healthcare: 1H- in line- back in strong base business growth mode
About the author:
- 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).
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.
- 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.
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