Sonic Healthcare Limited (SHL)
HOLD

COVID fade

 17 Nov 2022
Sector: Health Care

TRADING UPDATE

Need To Know

  • COVID-19 testing-related revenue down ~40% in the past 4 months.
  • EBITDA slightly below consensus. We expect small consensus downgrades for FY23
  • No earnings guidance given due to COVID testing volume uncertainties

Overview

SHL has come out with its trading update for the 4 months to October 2022. EBITDA came in below consensus and indicates a negative run rate. COVID-19 related revenue fell ~40% in 4 months and will come under further pressure as COVID-19 government payments are cut.

Base business revenue increased on 2021 and pre-pandemic levels. This is expected to continue as conditions normalise post-pandemic. The balance sheet remains in a strong net cash position, with a A$500m buyback ongoing (A$417m complete).  

We see this as a neutral update. We know SHL will eventually lose the COVID testing earnings.  The key questions are is just how fast this occurs, and does the share price reflect a normalised earnings outlook?

Trading update

4 months to October: Total revenue A$2,726m vs ~A$2,708m consensus. COVID-19 revenue fell from A$94.6m to A$57.7m, a ~40% reduction.

EBITDA was $621m. EBIT margins were 22.8%, which was up pre-covid levels 20.8% but down from FY21 at 32% (due to the COVID-19 benefits).

No guidance was given due to the “unpredictability of COVID-19 related conditions”.

Our View

Whilst the update was a small miss to consensus, the market was likely looking for a ‘more negative’ update.  We expect a relatively muted response from the share price. The business remains well run with the balance sheet expected to be net cash by FY24E

Trying to predict just how quickly the COVID testing earnings normalise is difficult and misses the bigger picture. The recent uptick in COVID cases only complicates the matter.

Our Hold Rating is premised normalisation of COVID earnings by FY24, leaving the company in a net cash position to pursue M&A or further capital management. At 20x 12mth FWD PER, in line with the 5-year average, SHL looks fairly priced given the outlook.

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Stock overview

Share Price

Company overview

Sonic Healthcare Limited is an Australia-based healthcare provider. The Company is engaged in specialist operations in laboratory medicine/pathology, radiology, general practice medicine, and corporate medical services. The Laboratory segment provides pathology/clinical laboratory services in Australia, New Zealand, the United Kingdom, the United States of America, Germany, Switzerland, and Belgium. The Radiology segment provides diagnostic imaging services in Australia.

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