Return to normal

1H23 RESULT

Need To Know

• 8% base business growth in-line, although gaining momentum
• Strong cost control driving small EBITDA beat ($920m vs ~$905m)
• 5% lift in dividend to 42cps from 40cps

The result had a lot of positives despite being relatively in-line with consensus. Covid revenue fell -72% to just $379m, as the business returns to normal operations. Base business growth of 8% to $3.7bn is a solid result and is now up 11% on pre-pandemic levels. Jan 2023 base business trading was up 10% vs Jan 2020. The progressive dividend policy was maintained, increasing 5% to 42cps. 

Cost control. SHL has put a major focus on costs, with base business margins remaining strong and in-line with pre-pandemic levels, which is an extraordinary outcome given inflationary pressures and some businesses not fully recovered. Consumable costs reduced as a % of revenue, and SHL expects procurement savings to continue. SHL has been right sizing the business, saving on labour costs.

Highlights. The PAMA Medicare (US) fee cuts (~US$15m pa impact) have been deferred until calendar 2024. SHL has been awarded the preferred bidder status for large 15-year UK NHS lab contract. Strong ThyroSeq (exclusive licensed thyroid cancer genetic test) revenue growth of >25%, with run rate revenue of ~A$55m. Oncotype DX breast cancer genetic test revenues growing strongly in Germany.  Australia PCR aged care testing extended until at least April 2023. Radiology now 10% of revenue, with 50bps margin expansion in the half despite most competitors struggling. 

Solid balance sheet. SHL has $1.5bn in available headroom (before interim dividend), and the on-market share buyback is $425m complete out of $500m. Debt cover sits at 0.5x, still well below ~2.4x pre-pandemic average, where SHL is well positioned to fund value-accretive acquisitions, with management commenting it is “well advanced on acquisition and contract opportunities.”

Investment View

There are a lot of positives to take out of the result, with the outlook faring better than the market had expected. Covid revenue has fallen as expected, however SHL still expects “ongoing testing revenue, fluctuating by geography,” with the January run rate at A$32m. 

The cost control measures surprised the market, with margins returning to pre-pandemic levels, despite the inflationary environment. 

The significant balance sheet power and comments around M&A provide plenty of catalyst opportunities, however on valuation, trading on ~19x PER, it is relatively in-line with its longer-term average, so we retain our Hold recommendation. 

Figure 1: Base business returning to normal, seeing solid growth