Sonic Healthcare Limited (SHL)
HOLD

Better than feared

 24 Aug 2022
Sector: Health Care

FY22 RESULT

Need to know:

  • Clean result, 3-4% ahead of the market
  • No guidance for FY23, given the expected COVID revenue fade
  • Balance sheet flush with cash, providing M&A optionality

Investment Implications

Result FY22: Strong COVID testing volumes drove a 3-4% beat across all aspects of the result. A clean set of accounts, backed with strong cash flow, leaving the company with very low levels of gearing. The share buyback is two-thirds complete. The market is looking for a 40-50% decline in earnings in FY23 as COVID testing volumes fade.   

Details: Rev $9.3bn vs $9.2bn market, EBITDA $2.8bn vs $2.7bn market, NPAT $1.5bn vs $1.4bn market. EPS 302cps vs 294cps market. DPS 100cps vs 96cps market.

Cash flow/balance sheet: Operating cash flow is strong at $2.4bn (95% cash conversion). This leaves the balance sheet with $800m of net debt and gearing at just 0.3x EBITDA. Prior to COVID, this was 2.5x. SHL remains open to acquisitions given the available funding headroom on the balance sheet.

Share buy-back ongoing: SHL is two-thirds of the way through $500m on market share buyback. Through FY22, SHL spent ~$600m on acquisitions, in addition to the buy-back.  

Ex-COVID growth: stripping out COVID-related revenues sees a mixed growth rate across the Regions. Aus Pathology -1%, Radiology +14%, USA +2%, Germany +3%, Switzerland +5%, UK +24%. Overall, the base business in FY22 is +5.5% below FY19 levels.

Our view on SHL: a credible result leaving the business in a strong position to consider further M&A.

In our view, the market will continue to grapple with what price to pay for SHL, given the expected fade in COVID testing revenue over FY23-24E.

The market is currently expecting EPS to fall 40% in FY23E. At 10x forward PER, SHL’s multiple is ~30% below 2016-19 levels. We rate SHL a Hold.

This commentary reflects our initial view. For detailed reports for companies under Sandstone Insights coverage, see our latest research notes for our investment view and specific risks associated with investing in these companies.

Figure 1: Strong cash generation has balance sheet close to net a cash position

Stock overview

Share Price

Company overview

SHL provides laboratory services, pathology, and radiology services across Australia, Europe, and the US.

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